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Transmitting shocks to the economy: The contribution of interest and exchange rates and the credit channel

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Edda Claus
ris Claus

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Abstract

Understanding 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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Paper provided by IIIS in its series The Institute for International Integration Studies Discussion Paper Series with number iiisdp206.

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Date of creation: 19 Feb 2007
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Handle: RePEc:iis:dispap:iiisdp206

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Keywords: Transmission channels; open economy; general equilibrium model;

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  3. Ramey, Valerie, 1993. "How important is the credit channel in the transmission of monetary policy?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 1-45, December. [Downloadable!] (restricted)
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  4. Dungey, Mardi & Pagan, Adrian, 2000. "A Structural VAR Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 76(235), pages 321-42, December.
  5. repec:pal:imfstp:v:45:y:1998:i:2:p:6 is not listed on IDEAS
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  6. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  7. McCallum, Bennett T & Nelson, Edward, 2000. "Monetary Policy for an Open Economy: An Alternative Framework with Optimizing Agents and Sticky Prices," Oxford Review of Economic Policy, Oxford University Press, vol. 16(4), pages 74-91, Winter.
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  8. Ignazio Angeloni & Anil K. Kashyap & Benoît Mojon & Daniele Terlizzese, 2003. "The output composition puzzle: a difference in the monetary transmission mechanism in the euro area and United States," Proceedings, Federal Reserve Bank of Cleveland, pages 1265-1317.
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  10. Julia Hall & Grant Scobie, 2005. "Capital Shallowness: A Problem for New Zealand?," Treasury Working Paper Series 05/05, New Zealand Treasury. [Downloadable!]
  11. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December. [Downloadable!] (restricted)
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  14. repec:fth:bfdipa:18/2001 is not listed on IDEAS
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  16. Huang, Angela & Margaritis, Dimitri & Mayes, David, 2001. "Monetary policy rules in practice: Evidence from New Zealand," Research Discussion Papers 18/2001, Bank of Finland. [Downloadable!]
  17. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September. [Downloadable!] (restricted)
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