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The Impact of Foreign Interest Rateson the Economy

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  • Julian di Giovanni
  • Jay C. Shambaugh

Abstract

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 large-country 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 large-country interest rates affect small economies. The direct monetary policy channel is the most likely channel when compared with other possibilities, such as a general capital market effect or a trade effect.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/37.

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Length: 46
Date of creation: 01 Feb 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/37

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Keywords: Interest rates; Economic growth; Economic models; exchange rate; monetary policy; inflation; exchange rate regime; nominal interest rate; exchange rate regimes; exchange rates; real output; nominal interest rates; fixed exchange rate; fixed exchange rates; exchange restrictions; monetary economics; real interest rates; exchange rate arrangements; nominal exchange rate; high inflation; inflation rate; real interest rate; fixed exchange rate countries; terms of trade; exchange rate regime classification; exchange arrangements; foreign exchange; exchange rate change; exchange rate volatility; exchange rate appreciation; history of exchange rate; domestic exchange rate; foreign currency; gdp deflator; exchange rate regime classifications; macroeconomic stability; exchange rate changes; terms of trade shocks; exchange rate regime durability; exchange rate systems; real exchange rate appreciation; real exchange rate; exchange rate channels; constant exchange rate;

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References

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Citations

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Cited by:
  1. César Calderón; Rodrigo Fuentes. & Rodrigo Fuentes., 2009. "Removing the Constraints for Growth: Some Guidelines Some Guidelines," Documentos de Trabajo, Instituto de Economia. Pontificia Universidad Católica de Chile. 366, Instituto de Economia. Pontificia Universidad Católica de Chile..
  2. Weshah Razzak, 2009. "On the GCC Currency Union," EERI Research Paper Series EERI_RP_2009_29, Economics and Econometrics Research Institute (EERI), Brussels.
  3. Lane, Philip R. & Shambaugh, Jay C., 2010. "The long or short of it: Determinants of foreign currency exposure in external balance sheets," Journal of International Economics, Elsevier, Elsevier, vol. 80(1), pages 33-44, January.
  4. Nicola Cetorelli & Linda S. Goldberg, 2008. "Banking Globalization, Monetary Transmission, and the Lending Channel," NBER Working Papers 14101, National Bureau of Economic Research, Inc.
  5. Klein, Michael W. & Shambaugh, Jay C., 2008. "The dynamics of exchange rate regimes: Fixes, floats, and flips," Journal of International Economics, Elsevier, Elsevier, vol. 75(1), pages 70-92, May.

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