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Global transmission of interest rates: monetary independence and currency regime

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Listed author(s):
  • Frankel, Jeffrey
  • Schmukler, Sergio L.
  • Serven, Luis

Abstract

Using a large sample of developing and industrialized economies during 1970-1999, this paper explores whether the choice of exchange rate regime affects the sensitivity of local interest rates to international interest rates. In most cases, we cannot reject full transmission of international interest rates in the long run, even for countries with floating regimes. Only large industrial countries can benefit, or choose to benefit, from independent monetary policy. However, short-run effects differ across regimes. Dynamic estimates show that interest rates of countries with more flexible regimes adjust more slowly to changes in international rates.

(This abstract was borrowed from another version of this item.)

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 23 (2004)
Issue (Month): 5 (September)
Pages: 701-733

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Handle: RePEc:eee:jimfin:v:23:y:2004:i:5:p:701-733
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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Find related papers by JEL classification:
  • F31 - International Economics - - International Finance - - - Foreign Exchange
  • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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  1. Frankel, Jeffrey A. & Fajnzylber, Eduardo & Schmukler, Sergio L. & Serven, Luis, 2001. "Verifying exchange rate regimes," Journal of Development Economics, Elsevier, vol. 66(2), pages 351-386, December.
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  3. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
  4. Pesaran, M.H. & Shin, Y., 1995. "An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis," Cambridge Working Papers in Economics 9514, Faculty of Economics, University of Cambridge.
  5. Pesaran, M Hashem, 1997. "The Role of Economic Theory in Modelling the Long Run," Economic Journal, Royal Economic Society, vol. 107(440), pages 178-191, January.
  6. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December.
  7. 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.
  8. Holman, Jill A. & Rioja, Felix K., 2001. "International transmission of anticipated inflation under alternative exchange-rate regimes," Journal of International Money and Finance, Elsevier, vol. 20(4), pages 497-519, August.
  9. Jonathan David Ostry & Anne Marie Gulde & Atish R. Ghosh & Holger C. Wolf, 1995. "Does the Nominal Exchange Rate Regime Matter?," IMF Working Papers 95/121, International Monetary Fund.
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  11. Kaminsky, Graciela Laura & Schmukler, Sergio L., 2002. "Short-run pain, long-run gain : the effects of financial liberalization," Policy Research Working Paper Series 2912, The World Bank.
  12. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
  13. Boswijk, H. Peter, 1995. "Efficient inference on cointegration parameters in structural error correction models," Journal of Econometrics, Elsevier, vol. 69(1), pages 133-158, September.
  14. 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.
  15. Bardsen, Gunnar, 1989. "Estimation of Long Run Coefficients in Error Correction Models," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 51(3), pages 345-350, August.
  16. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
  17. Carlo Cottarelli & Curzio Giannini, 1997. "Credibility Without Rules," IMF Occasional Papers 154, International Monetary Fund.
  18. Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2005. "Classifying exchange rate regimes: Deeds vs. words," European Economic Review, Elsevier, vol. 49(6), pages 1603-1635, August.
  19. 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.
  20. Frankel, Jeffrey & Schmukler, Sergio & Serven, Luis, 2000. "Global transmission of interest rates : monetary independence and the currency regime," Policy Research Working Paper Series 2424, The World Bank.
  21. Badi H. Baltagi & Chihwa Kao, 2000. "Nonstationary Panels, Cointegration in Panels and Dynamic Panels: A Survey," Center for Policy Research Working Papers 16, Center for Policy Research, Maxwell School, Syracuse University.
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