Global Transmission of Interest Rates: Monetary Independence and Currency Regime

Posted: 17 Oct 2003

See all articles by Jeffrey A. Frankel

Jeffrey A. Frankel

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Sergio L. Schmukler

World Bank - Development Research Group (DECRG)

Luis Servén

World Bank - Development Research Group (DECRG)

Multiple version iconThere are 3 versions of this paper

Abstract

Using a large sample of developing and industrialized economies during 1970-1999, this paper explores whether the choice of exchange rate regime affects the sensitivity of local interest rates to international interest rates. In most cases, we cannot reject full transmission of international interest rates in the long run, even for countries with floating regimes. Only a couple of large industrial countries can choose their own interest rates in the long run. However, short-run effects differ across regimes. Dynamic estimates show that interest rates of countries with more flexible regimes adjust more slowly to changes in international rates, implying some capacity for monetary independence.

Keywords: interest rates, exchange rate regime, currency regime, monetary independence, monetary policy

JEL Classification: F31, F32, F33, F36

Suggested Citation

Frankel, Jeffrey A. and Schmukler, Sergio and Servén, Luis, Global Transmission of Interest Rates: Monetary Independence and Currency Regime. Journal of International Money & Finance, Vol. 23, No. 5, pp. 701-733, 2004. Available at SSRN: https://ssrn.com/abstract=451280 or http://dx.doi.org/10.2139/ssrn.451280

Jeffrey A. Frankel

Harvard University - Harvard Kennedy School (HKS) ( email )

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HOME PAGE: http://www.ksg.harvard.edu/fs/jfrankel

National Bureau of Economic Research (NBER)

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Sergio Schmukler (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

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HOME PAGE: http://www.worldbank.org/en/about/people/s/sergio-schmukler

Luis Servén

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

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