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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.

Suggested Citation

  • Julian di Giovanni & Jay C. Shambaugh, 2007. "The Impact of Foreign Interest Rates on the Economy: The Role of the Exchange Rate Regime," NBER Working Papers 13467, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:13467
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    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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