Macroprudential Policies, the Long-Term Interest Rate and the Exchange Rate

30 Pages Posted: 28 Oct 2016

See all articles by Philip Turner

Philip Turner

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: October 2016

Abstract

The Bernanke-Blinder closed economy model suggests that macroprudential policies aimed at bank lending will affect the domestic long-term interest rate. In an open economy, domestic shocks to long-term rates are likely to influence capital flows and the exchange rate. Currency movements feed back into domestic credit through several channels, which will be influenced by balance sheet positions and not only by income flows. Macroprudential policies aimed at domestic credit and at foreign currency borrowing may be the best option open to small countries facing very low global interest rates and risky domestic credit expansion.

Keywords: Bernanke-Blinder model, capital flows, interest rate policy, macroprudential policy

JEL Classification: E43, E58, F41, G28

Suggested Citation

Turner, Philip, Macroprudential Policies, the Long-Term Interest Rate and the Exchange Rate (October 2016). BIS Working Paper No. 588. Available at SSRN: https://ssrn.com/abstract=2857777

Philip Turner (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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