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Benign neglect of the long-term interest rate


  • Philip Turner


Large-scale central bank purchases of government bonds have made the long-term interest rate key in the monetary policy debate. How central banks react to bond market movements has varied greatly from one episode to another. Driving the term premium in long-term rates negative may stimulate aggregate demand. And a negative term premium encourages borrowers to lengthen the maturity of their debts. Such a reduction in maturity risks makes the financial system more resilient to shocks, and in particular can help emerging economies finance their heavy infrastructure and housing investment needs more safely. But an extended period of very low long rates and high public debt creates financial stability risks. Interest rate risk in the banking system has grown, and some institutional investors face significant exposures. Central banks in the advanced economies now hold a high proportion of bonds issued by their governments, most of which have so far failed to arrest the rise in the ratio of government debt to GDP. Implementing an effective exit strategy will be difficult. Current policy frameworks should be reconsidered, with a view to clarifying the importance of the long-term interest rate for monetary policy, for financial stability and for government debt management.

Suggested Citation

  • Philip Turner, 2013. "Benign neglect of the long-term interest rate," BIS Working Papers 403, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:403

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    References listed on IDEAS

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    Cited by:

    1. Toni Beutler & Robert Bichsel & Adrian Bruhin & Jayson Danton, 2015. "The Impact of Interest Rate Risk on Bank Lending," Working Papers 15.05, Swiss National Bank, Study Center Gerzensee.
    2. Bank for International Settlements, 2016. "Expanding the boundaries of monetary policy in Asia and the Pacific," BIS Papers, Bank for International Settlements, number 88, february.
    3. Ronny Mazzocchi, 2013. "Monetary Policy when the NAIRI is unknown: The Fed and the Great Deviation," DEM Discussion Papers 2013/16, Department of Economics and Management.
    4. Alexander Guarín & José Fernando Moreno & Hernando Vargas, 2014. "An empirical analysis of the relationship between US and Colombian long-term sovereign bond yields," BIS Papers chapters,in: Bank for International Settlements (ed.), The transmission of unconventional monetary policy to the emerging markets, volume 78, pages 129-158 Bank for International Settlements.
    5. Jagjit S Chadha & Philip Turner & Fabrizio Zampolli, 2013. "The interest rate effects of government debt maturity," BIS Working Papers 415, Bank for International Settlements.
    6. Anamaria Illes & Marco Lombardi & Paul Mizen, 2015. "Why did bank lending rates diverge from policy rates after the financial crisis?," BIS Working Papers 486, Bank for International Settlements.
    7. Jongrim Ha & Inhwan So, 2017. "Which Monetary Shocks Matter in Small Open Economies? Evidence from SVARs," Working Papers 2017-2, Economic Research Institute, Bank of Korea.

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    Central banks; bond market crisis; exit strategy; sovereign debt management;

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