The Impact of Foreign Interest Rateson the Economy : The Role of the Exchange Rate Regime

Author/Editor:

Julian Di Giovanni ; Jay C Shambaugh

Publication Date:

February 1, 2006

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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 large-country 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 large-country interest rates affect small economies. The direct monetary policy channel is the most likely channel when compared with other possibilities, such as a general capital market effect or a trade effect.

Series:

Working Paper No. 06/37

Subject:

English

Publication Date:

February 1, 2006

ISBN/ISSN:

9781451862973/1018-5941

Stock No:

WPIEA2006037

Format:

Paper

Pages:

46

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