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

IMF Working Papers, May 1, 2006

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

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Bibliographic details

Authors: Ivan Tchakarov, Selim A Elekdag
Published: May 1, 2006
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9781451863703.001

Summary / Context

Emerging market countries experienced an "exceptionally favorable economic environment throughout 2004, 2005, and early 2006."
"Accommodative U.S. monetary policy in recent years has helped create an environment of low interest rates in international capital markets."
A sudden upward course in world interest rates would "lead to less hospitable financing conditions for emerging market countries."
Purpose: "to measure the effects of world interest rate shocks on real activity in Thailand."

Methodology

The analysis "incorporates balance sheet related credit market frictions into the IMF’s Global Economy Model (GEM)."

Key Findings

Primary empirical conclusion: "Thailand would best minimize the adverse effects of rising world interest rates if it were to follow a flexible exchange rate regime."
The paper quantifies effects of world interest rate shocks on "real activity in Thailand" using the modified GEM.

Policy Implications and Recommendations

Adopt or maintain a flexible exchange rate regime to "minimize the adverse effects of rising world interest rates."
Consider balance-sheet related credit market frictions when assessing vulnerability to world interest rate shocks and when designing macroeconomic policy responses.

Subjects and Keywords

Subjects: Emerging and frontier financial markets; Exchange rate arrangements; Exchange rate flexibility; Financial statements; Real interest rates
Keywords: nominal interest rate; price; real interest rate; Thailand; WP; yield

Ivan Tchakarov, Selim A Elekdag; May 1, 2006 — "The Role of Interest Rates in Business Cycle Fluctuations in Emerging Market Countries: The Case of Thailand".