Trump 2.0 Tariffs Policy: The administration’s renewed focus on tariffs could weigh heavily on currencies of trade-exposed economies, particularly those in Asia and the Eurozone. The appointment of China hawks to the cabinet is spelling a clear near-term focus on trade and tariff policy, which is USD-positive. The Chinese yuan (CNH), euro (EUR), Mexican peso (MXN), and Australian dollar (AUD) are among the most vulnerable to this trade pressure, as these regions face heightened risks from tariff wars.

Trump 2.0 Fiscal Policy: The fiscal push, including tax cuts and deregulation, is likely to support US growth, which could drive yields higher. Rising yields, particularly in the US, increase the relative appeal of the USD against lower-yielding currencies, further boosting demand for the dollar.

Fed Easing from Strength: While the Fed is cutting rates, it is doing so from a position of economic strength, with the US economy continuing to show resilience. This strength provides a solid foundation for the dollar, as markets see the Fed’s actions as a proactive measure rather than a response to economic weakness.

US Exceptionalism: The continued political and economic challenges facing other major global players, particularly Europe and Japan, further bolster the USD. In Europe, political instability—especially in Germany where a ‘snap’ election will now be held next February – is adding to the economic malaise. Meanwhile, Japan’s delay in raising rates leaves the yen in a precarious position.

Geopolitical Risks: Geopolitical tensions, particularly in the Middle East, have the potential to flare up at any moment, further supporting the dollar’s safe-haven status. In times of heightened global uncertainty, investors typically flock to the USD, increasing its demand.

Given these factors, the USD still has room to run. With the ongoing pressures on trade-exposed currencies, the US dollar is likely to remain a dominant force in global markets.

EUR: Political instability in Europe, combined with an already fragile economic recovery and the looming threat of tariffs, leaves the euro vulnerable.

CNH (Chinese yuan) and China-proxies like AUD: As the US-China trade war intensifies, the yuan faces increasing pressure, especially with China’s policy stance favoring further stimulus.

JPY: Carry trades could gain interest once again with Fed’s easing stance likely to be more cautious and BOJ’s hesitant on rate hikes under the new government.

Commodities: Commodities are facing a double whammy—downward pressure on demand due to escalating trade frictions and a stronger US dollar. As tariffs hit global supply chains and trade volumes, the demand outlook for key commodities, such as industrial metals and oil, weakens. Additionally, a higher USD often makes commodities more expensive for holders of other currencies, further dampening global demand.

GBP: Sterling is less exposed to tariff-risks and an inflationary budget could slow down the pace of BOE rate cuts.

The rise in geopolitical risk and mounting trade tensions should have a counterpart in financial deglobalization, as investors pull back from global trouble spots. Most obviously, if friendshoring is a material phenomenon, this should be reflected in foreign direct investment flows, with, for example, stronger flows to Mexico, while China should see weaker inflows or even outflows. A similar trend may be visible in portfolio flows if Russia’s invasion of Ukraine makes markets wary of potential conflict zones. We assemble quarterly data on nonresident portfolio and direct investment flows to 25 emerging markets (EMs) from 2000 to 2024. These data show a healthy picture for EM overall, though China is a negative outlier. China has seen nonresident portfolio inflows weaken significantly from before Russia invaded Ukraine, in addition to foreign direct investment flows also softening recently. While these data points are consistent with financial deglobalization, a proper investigation will compare flows to a counterfactual linking them to underlying fundamentals such as interest and growth differentials. We leave a more definitive assessment of financial deglobalization for a follow-up post.

We collect quarterly nonresident portfolio and direct investment flows to EM from 2000 to 2024. The portfolio data capture investment flows into stocks and bonds. We filter direct investment flows for reinvested earnings, which—in an important case like China—are often involuntary due to the difficulty of repatriating earnings. These reinvested earnings move up and down with profitability in foreign-owned subsidiaries and say little about genuine foreign direct investment (FDI). FDI excluding reinvested earnings is a better proxy for greenfield investment in EM. That said, the distinction between genuine FDI and reinvested earnings is often not clear-cut, an issue we will explore further in future posts.

Figure 1 shows the rolling, four-quarter sum of nonresident portfolio flows to all 25 EMs we examine. It scales these flows by the combined dollar-denominated GDP for these countries. Figure 2 is the same thing but excludes China in the numerator and denominator. Two conclusions emerge. First, portfolio flows to non-China EMs have been stable over the past decade, so financial deglobalization does not appear to be a material phenomenon. Second, China is a different story. Flows were on a rising trend before Russia invaded Ukraine, but that period is over. Perhaps this is because markets are now more attuned to geopolitical risk since Russia’s invasion of Ukraine, but it could equally well reflect China-specific factors, like the disappointing recovery since COVID-19 lockdowns were lifted. A similar divergence is evident in FDI flows. Figure 3 shows the rolling, four-quarter sum of FDI flows excluding reinvested earnings for the 25 EMs, again scaled by dollar-denominated GDP, while Figure 4 is the equivalent excluding China. True FDI—excluding reinvested earnings—is quite stable for non-China EM, but is showing a precipitous decline for China recently.

We now examine flows to individual countries. We compare flows before and after COVID-19, since the pandemic was such an important event for the global economy. Figure 5 shows annualized quarterly portfolio inflows from Q1 2020 to Q2 2024 in percent of GDP on the horizontal axis, while the vertical axis shows the same metric from Q3 2015 to Q4 2019. We thus look at the 4 1/2 years since the pandemic versus the 4 1/2 years before. Figure 6 is the same for FDI. In both cases, China (red) and Mexico (purple) lie above the diagonal, which leans against the friendshoring narrative. After all, Mexico should be attracting stronger inflows in this narrative, while China should be seeing weaker inflows. Commodity-heavy countries like Chile (CL), Colombia (CO), Malaysia (MY), and Saudi Arabia (SA) do better in the recent time window, while commodity importers like the Czech Republic (CZ), India (IN), and Turkey (TR) are doing worse.

One widely held view is that FDI flows are more stable than portfolio flows. In this regard, capital flows to EM have become more stable in recent years. Figures 7 and 8 show portfolio inflows on the vertical axis and FDI inflows on the horizontal axis for 2020-2024 and 2015-2019, respectively. The more recent time window shows a shift downward and to the right, pointing to the relatively greater importance of FDI over portfolio flows. Of course, this no doubt is related to the post-COVID inflation scare and G10 central bank hikes, which weighed on portfolio flows to EM. Nonetheless, this says that the composition of EM inflows is more favorable now than it was in the run-up to COVID-19. Overall, portfolio flows to EM look quite healthy and stable, with the exception of China where financial deglobalization looks to be underway.

A full and literal implementation across taxes, trade and immigration could have unwelcome consequences for the economy in both the short and long run. A more partial implementation, (which seemed to be anticipated by financial markets last week), could net out to be positive for stocks and negative for Treasuries in the short run. However, even this more restrained policy path would likely result in sharply-rising government debt and the potential, in some areas, for building economic and market risks. For this reason and because of the further run up in the U.S. equity valuations in the wake of the election, investors would be well advised to continue to rebalance portfolios both across asset classes and around the world.

In his press conference last week, Jay Powell made it clear that the Fed was not going to prejudge any policies that might be implemented until they were outlined in detail and on their way to being enacted. In his words, “We don’t guess, we don’t speculate, and we don’t assume”. Unfortunately, investors don’t have the luxury of waiting that long and so have to make some base case judgements on what will or will not be implemented.

An assessment of probable federal government policy, over at least the next two years, should start with the election results themselves. In the end, despite very close polls going into election day, it was a decisive Republican sweep. With the White House and a comfortable majority in both Houses of Congress, a naive assessment might be that the President-elect would simply do everything he said he would do on the campaign trail.

However, this seems unlikely. A newly-elected President Trump will have less personal motivation to implement many of his campaign promises since he cannot run for office again. By contrast, those who have his ear, including big donors to his campaign, some foreign leaders and Republican members of Congress will be very motivated to further their interests. Seen from this perspective, a good question to ask, on any agenda item, is how much it might further the interests of interested parties.

One critical issue for markets and the economy going into 2025, will be how the Administration approaches extending those tax cuts from the 2017 Tax Cut and Jobs Act (TCJA) that were set to expire at the end of next year. A bill will likely wend its way through Congress over the course of next year containing the answer to this question.

It is reasonable to assume that current rates on individual and corporate income taxes and on the estate tax will all now be extended, including a continuation of annual inflation indexing of exemptions and tax-bracket thresholds. President-Elect Trump has also made it clear that any tax bill would allow the cap on SALT deductions, which funded a small part of the 2017 tax cut, to expire on schedule at the end of this year, adding to the cost of the bill although benefiting more affluent homeowners.

In addition to this, President-Elect Trump promised a further cut in the corporate income tax rate from 21% to 15% for “domestic production”. Such a tax cut would obviously boost the after-tax earnings of both public and privately-held corporations and they can be expected to lobby hard to achieve both the cut and a very broad definition of “domestic production”. In addition, business interests will argue that the President should follow through on his promise of a renewal of full expensing for investments in equipment and R&D, again for domestic production.

Some of the other campaign commitments will be harder to implement. The promises to eliminate taxes on tip income and overtime would be extremely expensive even if they didn’t change the behavior of management and workers. However, inevitably, both would game the system, claiming that more worker income was, in fact, tips or overtime, further boosting the cost. Because of this, a Republican Congress might be tempted to leave these items out of a broad tax bill. That being said, Democrats in Congress might try to add them back in and would surely highlight Republican attempts to omit them, if they occur, in future election campaigns. Consequently, despite their cost, a reasonable baseline forecast is that they will be included, although perhaps watered down to some extent.

The proposals to allow for the deductibility of interest on auto loans and the elimination of taxation on social security are more straightforward from a definitional perspective and so might also make their way into the tax bill. All told, the overall cost of this tax bill would be enormous and reckless in the context of our long-term debt outlook. However, the interests of interested parties will tend to push it up. The problem is that while everyone may decry the long-term trajectory of the federal finances, each interest group will have a heavy incentive to get their particular tax break and voters have made it clear that they will not punish the fiscally reckless or reward the fiscally prudent.

There are at least three possible areas in which the new Administration and Congress might attempt to pay for at least some of the cost of these tax cuts.

First, President-Elect Trump has proposed having Elon Musk head an effort to cut government spending. However, it should be recognized that if Social Security, Medicare, Medicaid, Veterans Affairs, Defense and interest payments are off the table, there is actually very little of the federal budget left to cut. Moreover, almost every area of federal spending has powerful defenders among Republican as well as Democratic senators and House members.

Second, President-Elect Trump is likely to cut aid to Ukraine and possibly to NATO. However, while this may result in some savings, there will again be powerful advocates of military spending among Republicans in Congress who have military bases or armament production facilities in their districts and President-Elect Trump has also vowed to increase troop pay and invest in advanced military technology.

Third, President-Elect Trump has said that revenue from tariffs would fund tax cuts. The problem with this is that higher tariffs, by inviting retaliatory tariffs, would slow the economy, reducing revenues from other areas of income taxation.

So, in short, the tax bill is likely to amount to significant fiscal stimulus and add to deficits with no major revenue or spending offsets. According to the Committee for a Responsible Federal Budget1, a full implementation of President-Elect Trump’s proposals could boost the debt to GDP ratio from 98.2% of GDP in fiscal 2024 to 143% of GDP by fiscal 2035. That being said, because of the way it will likely be enacted (through the once-a-year budget reconciliation process) its provisions would likely not take effect until the start of 2026. In addition, as was the case with the 2017 Act, the 2025 Act will very likely include a sharp sunsetting of tax cuts within a 10-year window in order to avoid a filibuster under Senate rules.

Two areas where the policy bite may be less severe than the campaign bark are tariffs and immigration.

On tariffs, President-Elect Trump said he would impose a 10% tariff on goods imports from all countries and a 60% tariff on goods from China. While he seems to be actually attracted by the idea of tariffs, there are reasons to believe that any actual implementation would be less severe.

First, higher tariffs would be passed through to consumers in the form of higher prices and this would be particularly unpopular with the U.S. population following the inflation seen earlier this decade. These price increases could also boost long-term interest rates, including mortgage rates, and might cause the Federal Reserve to slow their easing.

Second, any higher tariffs imposed early next year would be immediately met by retaliatory tariffs from other countries, hurting U.S. exporters and commodity producers. Moreover, this would occur before any fiscal stimulus arrived from any tax bill passed in 2025 and could slow the U.S. economy or even put it into recession. This would not be an easy situation for Republican members of Congress ahead of the 2026 mid-term elections. And while President Trump essentially implemented his first-term trade agenda without congressional approval, it is very doubtful that he could legally do so with the more expansive measures he proposes for his second term2.

Third, business leaders have decidedly mixed views on tariffs. Some would oppose them in general on economic grounds, some would like to see them imposed on their competitors and some would like to see carveouts to avoid putting tariffs on their own suppliers. In addition, the U.S. couldn’t put new tariffs on Mexico and Canada under terms of the USMCA agreement that needs to be renegotiated in 2026 and the U.S. would likely have to engage in negotiations with many other countries in favoring some nations and disfavoring others. The interests of interested parties would likely water down any new round of tariffs although even a watered-down version could be harmful in terms of inflation, economic growth and general business uncertainty.

On immigration, President-Elect Trump has promised mass deportations. Deportations might well rise. However, business leaders will continue to point out the necessity of having foreign labor available given almost zero growth in the domestic, working-age population. There is also a distinct possibility that a Republican Congress will take the opportunity to pass an immigration reform act which, while tightening the rules on asylum-seeking in the U.S. and shutting the southern border to new undocumented migrants, finds ways to keep current migrants working in the U.S. economy.

Part of the reason for the Wall Street rally following the election was, undoubtedly, the promise of less regulation. It may well be that the Trump Administration delivers on this promise, reducing environmental and health regulations, constraints on the housing, energy and tech industries and regulation in the financial industry. All of this would tend to boost corporate profits somewhat.

However, investors should be a little careful what they wish for in this area. Fewer environmental regulations would generally boost corporate profits. However, a lack of any U.S. commitment on global warming would severely limit the world’s ability to deal with this problem with potentially disastrous long-term consequences. A lack of financial regulation, taken to an extreme could eventually lead to a financial crisis as it did in 2008. The severe anxiety issues being caused by social media, particularly for young people, probably call for more regulation rather than less. Moreover, while everyone has their own opinions on these issues, from my perspective, the proliferation of on-line gambling, crypto currencies, semi-automatic weapons and marijuana dispensaries are a negative, rather than a positive, for society.

The basic problem is that with deregulation, the beneficiaries are generally a small group of interested parties who will be particularly adept at getting their own way while long-term costs are borne by society as a whole.

Under these assumptions, in the short-run, the economy may well stay on a similar path to 2024. In the absence of any immediate fiscal stimulus, mass deportations or significant tariff increases, the economy could continue to see moderate growth, a low unemployment rate and inflation in the vicinity of 2%. Long-term interest rates would be higher due to the anticipation of fiscal stimulus in 2026. However, the prospect of further deregulation and tax cuts might well support investment spending and the stock market.

However, in the long run, there is great danger in an economy run in the interest of interested parties. These groups, whether ideological, political or simply commercial, generally have an interest in the government imposing less regulation, lower taxes and higher spending in specific areas. In the long run, this can degenerate into an ever-more unequal and indebted nation with less dynamism and greater risk of bubbles.

This may be where America is headed. Or it may turn out to be too gloomy a view of the future. However with the S&P500 now selling at over 22 times future earnings, with 10 companies now accounting for 37% of its total market cap and with U.S. equities now accounting for 65% of the global stock market, the risk that the U.S. will head down this path clearly justifies a more cautious and globally diversified approach.

China’s leadership has moved aggressively in recent weeks to support the world’s second largest economy, in part by stabilizing the housing market. Policymakers’ efforts to put a floor under property valuations may mark a turning point, according to Goldman Sachs Research.

“We are finally at an inflection point of the ongoing downward spiral in the housing market,” writes Yi Wang, who leads the China real estate team in Goldman Sachs Research. “This time is different from the previous piecemeal easing measures, in our view.”

Some $1 trillion of additional fiscal stimulus could be injected to help stabilize the housing market in the coming years, according to Goldman Sachs Research. The scale of the problem is huge: Our researchers estimate that China’s unsold inventory of housing would amount to RMB 93 trillion ($13 trillion) if it were fully built. By comparison, there will be an estimated total of about RMB 9 trillion in property sales this year.

The housing market is still in a precarious position, and much depends on the government’s follow through on support. Without intervention, Goldman Sachs Research estimates that property values may be at risk of falling by another 20% or 25%, which would drop them to about half of the peak in prices. But the government moves are positive nonetheless, and our researchers now estimate that property prices may stabilize by late 2025.

“Incremental government implementation of housing destocking will provide much better visibility for the housing market to stabilize in the coming years,” Wang writes.

Up to this point, government measures to heal the property market have fallen short, according to Goldman Sachs Research. It estimates that the supply of saleable housing inventory will be equal to more than two years of demand, as of the end of 2024.

Previously, the central bank had come up with measures including RMB 300 billion in lending support for state owned enterprises to buy completed but unsold housing inventory. Another RMB 4 trillion in credit was targeted to boost project completions. This has been insufficient, and there have been issues with the execution of these programs. Without additional stimulus, Wang estimates that the housing downturn could last another three years.

Now, however, there are indications that the government will follow through with enough additional fiscal stimulus to address the real estate market breakdown in the coming years.

With around RMB 8 trillion in stimulus coming, Goldman Sachs Research expects there will be resources to reduce the saleable inventory in the primary market while also helping to clear the construction backlog and restructure debt. This amount of stimulus would also address developers’ presold but uncompleted housing units. This will be key to “boost confidence among market participants,” the team writes.

With several previous efforts to boost China’s economy having briefly raised optimism and then fallen short of expectations, Goldman Sachs Research says it will be important to monitor the level of follow-through of government stimulus measures.

It will also be critical to identify signs of a recovery in the average selling price for properties in China’s largest and most prosperous cities, where demand may find support first, Wang writes. A rebound in these places could “help boost confidence among market participants for a broader market recovery going forward,” she writes.

Goldman Sachs Research also cautions, however, there’s no guarantee that these efforts will succeed. For example, our researchers note that there are similarities between China and Japan during its property downturn. Their case study of Tokyo real estate in 1992-93 suggests that negative demographic changes, a tough macroeconomic backdrop, and deflationary expectations can take the wind out of a property price rebound.

US retail sales rose 0.4% month-on-month in October, a touch higher than the consensus 0.3% MoM expectation while September’s growth rate was revised up to 0.8% from 0.4%. A big 1.6% MoM increase in autos was the main factor, but building materials (+0.5%) and restaurants and bars (+0.7%) both contributed strongly.

The “control” group, which excludes volatile items (the three just listed plus gasoline) and has a better record of tracking broader consumer spending that includes services, was quite a bit weaker, falling 0.1% MoM versus a +0.3% consensus. However, September’s growth rate was revised up to +1.2% from +0.7%. The key weakness was in furniture (-1.3%), health & personal care (-1.1%), sporting goods (-1.1%) and miscellaneous (-1.6%). All other components were in a -0.2% to +0.3% range.

It is likely that hurricane effects and warm weather across the US have had an impact on this report by boosting eating and drinking venues and hurting furniture and clothing stores, but the underlying trend remains firm.

In that regard we know the top 20% of households by income spend more than the entirety of the lowest 60% of households by income and the top 20% are in fantastic financial shape. Inflation has been less of a constraint, property and equity market wealth has soared and high interest rates benefit them – receiving 5%+ on money markets versus perhaps paying 3.5% on a mortgage, if they have one.

However, it is a very different story for the lowest 60% by income with inflation being much more painful while wealth gains have been far more modest, and soaring car loan and credit card borrowing costs have hurt. Loan delinquencies are on the rise and the proportion of credit card holders only making the minimum monthly payments has been soaring. That’s what makes the jobs data so important – if we see continued cooling there it increases financial stress and that could prompt weakness ahead even if the top 20% keep on spending strongly.

For now though the data is in line with Fed Chair Powell’s commentary that the “economy is not sending signals that we need to be in a hurry to lower rates” and leaves the market pricing just 15bp of a potential 25bp rate cut at the December FOMC meeting. Next week’s calendar is light and in the knowledge that the core PCE deflator is almost certainly going to come in at 0.3% MoM on 27 November, and the jobs report on 6 December is going to be the next big focus for markets.

Industrial production fell 0.3% in October, not quite as soft as the -0.4% expectation in the market, but September’s output was revised down to -0.5% from -0.3%. Manufacturing output fell 0.5% in October as expected. The Boeing strike clearly weighed with output down 13.9% MoM for transportation after a 14.9% MoM drop in September. This should rebound markedly in coming months. Auto production also fell for the second month in a row with a mixed performance from other sectors. It is certainly likely that recent hurricanes disrupted output on a regional level – the Federal Reserve estimates the strikes knocked 0.2 percentage points off industrial production growth while the hurricanes subtracted a further 0.1pp. Nonetheless, that still points to a contraction even after those factors are excluded. Utilities output rose 0.7% while mining rose 0.3%.

Meanwhile, the NY Fed regional Empire manufacturing survey surged from -11.9 to +31.2. The consensus was 0.0. Now a lot of caution is needed on this report. The NY Fed area is a relatively small region for manufacturing when compared to the MidWest but this is a very big swing. It implies the level of activity is close to the situation we found ourselves at the height of the rebound of the economy in 2021. That said it is a measure or perception of general business conditions and the responses largely came in just after the election outcome – so the prospect of tax cuts and the belief in some circles that tariffs could boost the manufacturing sector may be in play here, but to be fair new orders performed strongly even if other areas remained subdued. We will have to see what the Philadelphia Fed, Kansas Fed and Dallas Fed surveys say next week. If the ISM was to rebound too that would increase the pressure on the Fed to slow the pace of rate cuts.

We assess in detail and over an extensive sample of banks the effect of macroprudential policies on banks’ margins, and the interaction of macroprudential and monetary policies in the determination of such margins. We also consider both short- and long-run impacts of macroprudential policies on the margin. We contend that the relative neglect in the literature of these effects on the margin is surprising, given their potential relevance to authorities in evaluating risks to financial stability and in the overall assessment of the stance of macroeconomic policy. We have employed an extensive dataset of up to 3,723 banks from 35 advanced countries over the extensive period 1990-2018, with typically around 35,000 observations and control variables similar to those in the existing literature. The results can be summarized as follows:

First, certain macroprudential policies do have an impact on banks’ net interest margins. The main effect is a negative impact on the margin in the short run from demand-based policies, namely loan-to-value limits and debt-service-to-income limits, and also supply-loan based policies such as controls on credit growth, foreign currency lending and loan to deposit ratios. These policies are aimed to constrain banks’ portfolio decisions in the interests of reducing lending and risk, and hence a negative effect on the margin is not surprising. In contrast, we find no short-run effects from capital-based policies and a positive one from general policies. We contend that these policies are primarily aimed at ensuring that banks can cope in the event of a systemic crisis by build-up of resilience, not at altering portfolio decisions on earning assets and hence should have more limited impact on interest margins.

Second, we find no long-run effects for the summary measures of policy, apart from a weak negative effect from loan-supply targeted policies, although some are found for individual instruments. This is suggestive of countervailing action by banks against any short-run impact on margins from macroprudential policy.

Third, there are significant interactions with monetary policy, as shown when the action and stance of macroprudential policy is leveraged in combination with the stance of monetary policy as shown by the level of the interest rate. Short-run positive interaction effects are detected for a number of summary and individual macroprudential policies, so that negative effects on the margin from macroprudential policies can be offset in many cases at higher levels of interest rates. Some long-term interaction effects are detectable for individual macroprudential instruments, implying a considerable difference in effects on the margins depending on the stance of monetary policy.

We contend that the robustness checks underpin the validity of the baseline results. We suggest that the most important contributions of this study are the significant differential effects on the margin of different types of macroprudential policies, the different short- and long-run effects of macroprudential policies on the bank interest margin, and the significant monetary/macroprudential policy interactions. These have not been widely tested in the literature to date.

These results have important implications for policymakers seeking to assess the overall policy stance, not least when monetary policies are tightened to reduce inflationary pressures and macroprudential policies are tightened to reduce credit growth. For example, if both monetary and loan supply/demand focused macroprudential policies are tightened together, banks will initially have less net interest income from which to accumulate capital, with consequent risks to financial stability. On the other hand, these effects are mitigated if resilience-targeted forms of macroprudential policy such as capital and liquidity regulations are tightened along with monetary policy. In the long term, stringent monetary policies will tend to expand the margin while there is no offsetting effect from macroprudential polices except weakly in the case of loan-supply based policies. Loose monetary policies will however narrow the margin in the long run with risks to financial stability, especially if it leads banks to raise risk-taking to maintain profitability. More generally, since the effect of different macroprudential policy on margins varies across levels of interest rates, choice of macroprudential policy instruments needs to take this into account.

The results are also relevant for bank management, as they highlight the short-run challenge to profitability from a tightening of macroprudential policy, especially if it is combined with loose monetary policy. There may be an incentive to expand non-interest activity so that related income can compensate from loss of net interest income. While raising fee income may be risk neutral, other forms of non-interest income such as profits from portfolio trading may raise bank risk. On the other hand, the results suggest that in the longer term managers should be able to compensate for the initial impact of macroprudential policy on margins, which may, however, entail a shift to a higher-risk portfolio.

Further research could seek to investigate interest rate and macroprudential effects on margins in emerging market economies. This would however require a different specification for margin determination since such countries tend to lack long-term bond markets. It could also undertake further tests on advanced country banks, such as whether effects differ depending on bank size and capitalisation, by type of bank (retail or universal) and according to sub-periods. There could also be further work on macroprudential and monetary policy effects on other components of overall profitability, including provisions, noninterest expenses and noninterest income.

The advent of macroprudential policy alongside monetary policy raises the issue whether macroprudential policy has an additional effect on bank interest rate margins to that of monetary policy, and if so, whether it accentuates or offsets the interest rate effect. In light of this, we estimate combined effects of macroprudential policies and monetary policies on bank interest margins for up to 3,723 banks from 35 advanced countries over 1990-2018. In the short run, tightening of both types of policy tends to narrow the margin, while in the long run, monetary policy typically widens the margin while effects of macroprudential policies are mostly zero or positive, suggestive of countervailing action by banks. There are also significant interactions between macroprudential and monetary policy for several macroprudential policies; a tighter monetary stance is widely found to offset the negative effect of macroprudential policies on margins while a loose monetary policy leaves the negative effects intact, with potential consequences for financial stability. These results are of considerable relevance to policymakers, regulators and bank managers, not least when monetary policies are tight to reduce inflationary pressures.