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The Role of Interest Rates in Business Cycle Fluctuations in Emerging Market Countries: The Case of Thailand

  • Ivan Tchakarov
  • Selim Elekdag

Emerging market countries have enjoyed an exceptionally favorable economic environment throughout 2004, 2005, and early 2006. In particular, accommodative U.S. monetary policy in recent years has helped create an environment of low interest rates in international capital markets. However, if world interest rates were to take a sudden upward course, this would lead to less hospitable financing conditions for emerging market countries. The purpose of this paper is to measure the effects of world interest rate shocks on real activity in Thailand. The analysis incorporates balance sheet related credit market frictions into the IMF’s Global Economy Model (GEM) and finds that Thailand would best minimize the adverse effects of rising world interest rates if it were to follow a flexible exchange rate regime.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/110.

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Length: 24
Date of creation: 01 May 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/110
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  1. Mark Gertler & Simon Gilchrist & Fabio M. Natalucci, 2003. "External constraints on monetary policy and the financial accelerator," BIS Working Papers 139, Bank for International Settlements.
  2. Martin Uribe & Vivian Z. Yue, 2004. "Country spreads and emerging countries: who drives whom?," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  3. Selim Elekdag & Ivan Tchakarov, 2004. "Balance Sheets, Exchange Rate Policy, and Welfare," IMF Working Papers 04/63, International Monetary Fund.
  4. Pablo Andres Neumeyer & Fabrizio Perri, 1999. "Business Cycles in Emerging Economies: the role of interest rates," Department of Economics Working Papers 014, Universidad Torcuato Di Tella.
  5. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc.
  6. Fernandez-Arias, Eduardo & DEC, 1994. "The new wave of private capital inflows : push or pull?," Policy Research Working Paper Series 1312, The World Bank.
  7. Tamim Bayoumi & Hamid Faruqee & Douglas Laxton & Philippe D Karam & Alessandro Rebucci & Jaewoo Lee & Ben Hunt & Ivan Tchakarov, 2004. "GEM: A New International Macroeconomic Model," IMF Occasional Papers 239, International Monetary Fund.
  8. Selim Elekdag & Alejandro Justiniano & Ivan Tchakarov, 2006. "An Estimated Small Open Economy Model of the Financial Accelerator," IMF Staff Papers, Palgrave Macmillan, vol. 53(2), pages 2.
  9. Barry Eichengreen & Ashoka Mody, 1998. "What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment?," NBER Working Papers 6408, National Bureau of Economic Research, Inc.
  10. Richard Cantor & Frank Packer, 1996. "Determinants and impact of sovereign credit ratings," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 37-53.
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