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Global transmission of interest rates : monetary independence and the currency regime

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Author Info

  • Frankel, Jeffrey
  • Schmukler, Sergio
  • Serven, Luis

Abstract

The authors empirically study the sensitivity of local interest rates to international interest rates and how that sensitivity is affected by a country's choice of exchange rate regime. To establish the empirical regularities, they use a reduced-form empirical approach to compute both panel and single-country estimates of interest rate sensitivity for a large sample of developing and industrial economies between 1970 and 1999. When using the full sample, they find that: 1) Interest rates are typically lower in economies with fixed exchange rates than in those with flexible exchange rates. 2) More rigid currency regimes tend to exhibit higher transmission than more flexible regimes. In many cases in the 1990s, however, the authors cannot reject full transmission (a slope coefficient equal to 1), even for several countries with floating regimes. The data suggest an upward time trend in the degree to which domestic interest rates are sensitive to international capital movements and developing economies'increased financial integration with the rest of the world. As a result, country-specific estimates for the 1990s reveal few cases of less-than-full transmission of international interest rates to domestic rates, regardless of the currency regime. Country-specific results suggestthat only large industrial countries can (or choose to) benefit from independent monetary policy. During the 1990s, interest rates in European countries were fully sensitive to German interest rates but insensitive to U.S. interest rates.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2424.

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Date of creation: 31 Aug 2000
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Handle: RePEc:wbk:wbrwps:2424

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Related research

Keywords: Payment Systems&Infrastructure; Environmental Economics&Policies; Fiscal&Monetary Policy; Economic Theory&Research; Insurance&Risk Mitigation; Macroeconomic Management; Economic Stabilization; Economic Theory&Research; Environmental Economics&Policies; Insurance&Risk Mitigation;

References

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  1. Sebastian Edwards & Miguel A. Savastano, 1999. "Exchange Rates in Emerging Economies: What Do We Know? What Do We Need to Know?," NBER Working Papers 7228, National Bureau of Economic Research, Inc.
  2. Jeffrey Frankel & Sergio Schmukler & Luis Serven, 2000. "Verifiability and the Vanishing Intermediate Exchange Rate Regime," NBER Working Papers 7901, National Bureau of Economic Research, Inc.
  3. Jeffrey A. Frankel, 1999. "No Single Currency Regime is Right for All Countries or At All Times," NBER Working Papers 7338, National Bureau of Economic Research, Inc.
  4. Reinhart, Carmen & Calvo, Guillermo, 2001. "Fixing for your life," MPRA Paper 13873, University Library of Munich, Germany.
  5. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  6. Ricardo Hausmann & Ugo Panizza & Ernesto H. Stein, 2000. "Why Do Countries Float the Way They Float?," Research Department Publications 4205, Inter-American Development Bank, Research Department.
  7. Carlo Cottarelli & Curzio Giannini, 1997. "Credibility Without Rules," IMF Occasional Papers 154, International Monetary Fund.
  8. repec:fth:inadeb:418 is not listed on IDEAS
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