Transmitting shocks to the economy: The contribution of interest and exchange rates and the credit channel
AbstractUnderstanding the transmission channels of shocks is critical for successful policy response. This paper develops a dynamic general equilibrium model to assess the relative importance of the interest rate, the exchange rate and the credit channels in transmitting shocks in an open economy. The relative contribution of each channel is determined by comparing the impulse responses when the relevant channel is suppressed with the impulse responses when all three channels are operating. The results suggest that all three channels contribute to business cycle fluctuations and the transmission of shocks to the economy. But the magnitude of the impact of the interest rate channel crucially depends on the inflation process and the structure of the economy.
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Bibliographic InfoPaper provided by IIIS in its series The Institute for International Integration Studies Discussion Paper Series with number iiisdp206.
Date of creation: 19 Feb 2007
Date of revision:
Transmission channels; open economy; general equilibrium model;
Other versions of this item:
- Edda Claus & Iris Claus, 2007. "Transmitting Shocks To The Economy: The Contribution Of Interest And Exchange Rates And The Credit Channel," CAMA Working Papers 2007-03, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-02-24 (All new papers)
- NEP-CBA-2007-02-24 (Central Banking)
- NEP-DGE-2007-02-24 (Dynamic General Equilibrium)
- NEP-IFN-2007-02-24 (International Finance)
- NEP-MAC-2007-02-24 (Macroeconomics)
- NEP-MON-2007-02-24 (Monetary Economics)
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