When there are frictions in setting nominal wages, however, a targeting central bank, seeing this drift down in inflation, cuts the interest rate to keep inflation on target. In our model, this cut in the interest rate triggers a credit boom and makes the economic expansion much bigger than is socially optimal. In a situation like this, a central bank that ‘leans against the wind’ when credit expands sharply would raise welfare by reducing the magnitude of the boom-bust cycle
