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The impact of foreign interest rates on the economy: The role of the exchange rate regime

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Author Info
di Giovanni, Julian
Shambaugh, Jay C.

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Abstract

It is often argued that many economies are affected by conditions in foreign countries. 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 foreign 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 major-country interest rates affect other economies. The effect of foreign interest rates on domestic interest rates is the most likely channel when compared with other possibilities, such as a trade effect.

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File URL: http://www.sciencedirect.com/science/article/B6V6D-4PT7X9G-1/1/d05ca06a0f5fe911fa7e1273a2299ea1
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Publisher Info
Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 74 (2008)
Issue (Month): 2 (March)
Pages: 341-361
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Handle: RePEc:eee:inecon:v:74:y:2008:i:2:p:341-361

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Web page: http://www.elsevier.com/locate/inca/505552

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Nicola Cetorelli & Linda S. Goldberg, 2008. "Banking Globalization, Monetary Transmission, and the Lending Channel," NBER Working Papers 14101, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Philip R. Lane and Jay C. Shambaugh, 2008. "The Long or Short of it: Determinants of Foreign Currency Exposure in External Balance Sheets," The Institute for International Integration Studies Discussion Paper Series iiisdp253, IIIS. [Downloadable!]
    Other versions:
  3. César Calderón & Klaus Schmidt-Hebbel, 2008. "Business Cycles and Fiscal Policies: the Role of Institutions and financial Markets," Working Papers Central Bank of Chile 481, Central Bank of Chile. [Downloadable!]
  4. Masami Imai & Seitaro Takarabe, 2009. "Bank Integration and Local Credit Cycle:Evidence from Japan," Wesleyan Economics Working Papers 2009-002, Wesleyan University, Department of Economics. [Downloadable!]
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