The Impact of Foreign Interest Rateson the Economy: The Role of the Exchange Rate Regime

February 1, 2006

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Format: Chicago

Julian Di Giovanni, and Jay C Shambaugh. The Impact of Foreign Interest Rateson the Economy: The Role of the Exchange Rate Regime, (USA: International Monetary Fund, 2006) accessed October 16, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper explores the connection between interest rates in major industrial countries and annual real output growth in other countries. The results show that high large-country interest rates have a contractionary effect on annual real GDP growth in the domestic economy, but that this effect is centered on countries with fixed exchange rates. The paper then examines the potential channels through which large-country interest rates affect small economies. The direct monetary policy channel is the most likely channel when compared with other possibilities, such as a general capital market effect or a trade effect.

Subject: Exchange rate adjustments, Exchange rate arrangements, Financial services, Foreign exchange, National accounts, Personal income, Production, Production growth, Real interest rates

Keywords: Base country interest rate, Base country interest rates, Base interest rate effect, Country interest rate shock, Country interest rates, Exchange rate adjustments, Exchange rate arrangements, Exchange rate regime, Gap channel, Global, Interest rate channel, Interest rate coefficient, Interest rate gap, Interest rate movement, Interest rates, International transmission, Less developed country, Middle East, Output-interest rate relationship, Personal income, Production growth, Real interest rates, WP

Publication Details

Pages:

46
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2006/037
Stock No:

WPIEA2006037
ISBN:

9781451862973
ISSN:

1018-5941

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