International and domestic interactions of macroprudential and monetary policies: the case of Chile

Produced by: 
Banco Central de Chile
Available from: 
April 2020
Paper author(s): 
Tomás Gómez
Alejandro Jara
David Moreno
Topic: 
Macroeconomics - Economic growth - Monetary Policy
Year: 
2020

In this paper, we study whether prudential and monetary policy interactions play a role in the dynamic of domestic banks' lending growth rates in Chile. We look at a group of internationally active banks during 2000q1-2017q4. We ask whether the stance of domestic prudential (monetary) policies in Chile changes international monetary (prudential) policy spillovers and if the transmission of domestic monetary policy shocks to bank credit is affected by the stance of domestic prudential policy. We stress the importance of analysing each prudential policy separately, as results may vary due to banks' exposure to such policies as well as different mechanisms of transmission in place. Overall, tight foreign-currency reserve requirements seem to dampen the transmission of foreign monetary policy shocks significantly, while reinforcing that of local monetary policy. However, this result is less robust for other prudential policies considered. Finally, adverse spillovers from tightening capital requirements abroad may be amplified by a tight monetary policy at home.

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