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The Transmission of Foreign Interest Rate Shocks to a Small-Open Economy: The Role of External Debt and Financial Integration

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  • Demirel Ufuk D

    (University of Colorado at Boulder)

Abstract

This paper investigates the implications of external indebtedness and international financial integration on the effects of foreign interest rate shocks in a small-open economy. The empirical component of the analysis quantifies the effects of U.S. interest rate shocks on the Turkish economy. The theoretical component constructs a business cycle model that can successfully match the empirical impulse response functions. The model is estimated on quarterly Turkish data. It is found that the relationship between financial integration and macroeconomic volatility due to foreign interest rate shocks depends on the level of outstanding external debt. Financial integration mitigates the economy's responses to foreign rate shocks for higher levels of external debt and it magnifies the responses for lower levels of external debt.

Suggested Citation

  • Demirel Ufuk D, 2009. "The Transmission of Foreign Interest Rate Shocks to a Small-Open Economy: The Role of External Debt and Financial Integration," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-37, February.
    • Handle: RePEc:bpj:bejmac:v:9:y:2009:i:1:n:3
    DOI: 10.2202/1935-1690.1776
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    Cited by:

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    2. James Staveley-O'Carroll & Olena M. Staveley-O'Carroll, 2016. "Exchange Rate Targeting in the Presence of Foreign Debt Obligations," Working Papers 1604, College of the Holy Cross, Department of Economics.
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    4. Demirel, Ufuk Devrim, 2010. "Macroeconomic stabilization in developing economies: Are optimal policies procyclical?," European Economic Review, Elsevier, vol. 54(3), pages 409-428, April.

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