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The Role of Interest Rates in Business Cycle Fluctuations in Emerging Market Countries

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Author Info

  • Ivan Tchakarov
  • Selim Elekdag

Abstract

Emerging market countries have enjoyed an exceptionally favorable economic environment throughout 2004, 2005, and early 2006. In particular, accommodative U.S. monetary policy in recent years has helped create an environment of low interest rates in international capital markets. However, if world interest rates were to take a sudden upward course, this would lead to less hospitable financing conditions for emerging market countries. The purpose of this paper is to measure the effects of world interest rate shocks on real activity in Thailand. The analysis incorporates balance sheet related credit market frictions into the IMF’s Global Economy Model (GEM) and finds that Thailand would best minimize the adverse effects of rising world interest rates if it were to follow a flexible exchange rate regime.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/110.

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Length: 24
Date of creation: 01 May 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/110

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Related research

Keywords: Interest rates; Emerging markets; Economic models; exchange rate; flexible exchange rate; exchange rate regime; bond; bond market; exchange rate regimes; flexible exchange rate regime; nominal exchange rate; fixed exchange rate; emerging market bonds; global bond; exchange rate policy; global bond market; bonds; international financial statistics; emerging bond market; international interest rates; financial markets; fixed exchange rate regime; international financial markets; international capital; international finance; international capital markets; foreign exchange; foreign exchange market; financial stability; exchange rate movements; government bond yields; fixed exchange rate policy; financial fragility; government bond; interest rate fluctuations; exchange rates; exchange rate flexibility; nominal interest rate; bond yields; money market; money market rate; flexible exchange rate policy; stock losses;

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References

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  1. Ioan Carabenciov & Charles Freedman & Roberto Garcia-Saltos & Douglas Laxton & Ondra Kamenik & Petar Manchev, 2013. "Gpm6," IMF Working Papers 13/87, International Monetary Fund.
    • Tamim Bayoumi & Hamid Faruqee & Douglas Laxton & Philippe D Karam & Alessandro Rebucci & Jaewoo Lee & Ben Hunt & Ivan Tchakarov, 2004. "Gem," IMF Occasional Papers 239, International Monetary Fund.
  2. Martin Uribe & Vivian Z. Yue, 2003. "Country Spreads and Emerging Countries: Who Drives Whom?," NBER Working Papers 10018, National Bureau of Economic Research, Inc.
  3. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc.
  4. Mark Gertler & Simon Gilchrist & Fabio Natalucci, 2001. "External constraints on monetary policy and the financial accelerator," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  5. Pablo A. Neumeyer & Fabrizio Perri, 2004. "Business cycles in emerging economies: the role of interest rates," Staff Report 335, Federal Reserve Bank of Minneapolis.
  6. Barry Eichengreen & Ashoka Mody, 1998. "What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment?," NBER Working Papers 6408, National Bureau of Economic Research, Inc.
  7. Selim Elekdag & Ivan Tchakarov, 2004. "Balance Sheets, Exchange Rate Policy, and Welfare," IMF Working Papers 04/63, International Monetary Fund.
  8. Alejandro Justiniano & Selim Elekdag & Ivan Tchakarov, 2005. "An Estimated Small Open Economy Model of the Financial Accelerator," IMF Working Papers 05/44, International Monetary Fund.
  9. Fernandez-Arias, Eduardo & DEC, 1994. "The new wave of private capital inflows : push or pull?," Policy Research Working Paper Series 1312, The World Bank.
  10. Richard Cantor & Frank Packer, 1996. "Determinants and impact of sovereign credit ratings," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 37-53.
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