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The Impact of Foreign Interest Rates on the Economy: The Role of the Exchange Rate Regime

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  • Julian di Giovanni
  • Jay C. Shambaugh

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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13467.

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Date of creation: Oct 2007
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Publication status: published as di Giovanni, Julian & Shambaugh, Jay C., 2008. "The impact of foreign interest rates on the economy: The role of the exchange rate regime," Journal of International Economics, Elsevier, vol. 74(2), pages 341-361, March.
Handle: RePEc:nbr:nberwo:13467

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