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

di Giovanni, Julian; Shambaugh, Jay

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

IMF Working Paper No. 06/37

IIIS Discussion Paper No. 116

46 Pages Posted: 23 Mar 2006

See all articles by Julian di Giovanni

Julian di Giovanni

Federal Reserve Banks - Federal Reserve Bank of New York; Universitat Pompeu Fabra - Department of Economics and Business; Barcelona Graduate School of Economics (Barcelona GSE); CREI and Universitat Pompeu Fabra; Centre for Economic Policy Research (CEPR)

Jay Shambaugh

Dartmouth College - Department of Economics; Georgetown University - Department of Strategy/Economics/Ethics/Public Policy

There are 2 versions of this paper

Date Written: February 2006

Abstract

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.

Keywords: Exchange rate regime, international transmission, interest rates

JEL Classification: F3, F4

Suggested Citation: Suggested Citation

di Giovanni, Julian and Shambaugh, Jay, The Impact of Foreign Interest Rates on the Economy: The Role of the Exchange Rate Regime (February 2006). IMF Working Paper No. 06/37, IIIS Discussion Paper No. 116, Available at SSRN: https://ssrn.com/abstract=892928