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Transmitting shocks to the economy: The contribution of interest and exchange rates and the credit channel

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  • Edda Claus
  • ris Claus

Abstract

Understanding the transmission channels of shocks is critical for successful policy response. This paper develops a dynamic general equilibrium model to assess the relative importance of the interest rate, the exchange rate and the credit channels in transmitting shocks in an open economy. The relative contribution of each channel is determined by comparing the impulse responses when the relevant channel is suppressed with the impulse responses when all three channels are operating. The results suggest that all three channels contribute to business cycle fluctuations and the transmission of shocks to the economy. But the magnitude of the impact of the interest rate channel crucially depends on the inflation process and the structure of the economy.

Suggested Citation

  • Edda Claus & ris Claus, 2007. "Transmitting shocks to the economy: The contribution of interest and exchange rates and the credit channel," The Institute for International Integration Studies Discussion Paper Series iiisdp206, IIIS.
  • Handle: RePEc:iis:dispap:iiisdp206 Note: Length:
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    References listed on IDEAS

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    More about this item

    Keywords

    Transmission channels; open economy; general equilibrium model;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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