Using a dynamic stochastic general equilibrium model with banking, this paper first provides
evidence that, during the Great Moderation, monetary policy leaned against the wind blowing
from the loan market in the US. It then shows that the extent to which this occurred delivers
a small welfare loss relative to the optimised simple interest-rate rule that features only a
response to inflation. The source of business cycle fluctuations is crucial for the optimality of
a leaning-against-the-wind policy. In fact, the pro-cyclical nature of lending creates a trade-off
between inflation and financial stabilisation when supply shocks are prevalent