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

Julian di Giovanni and Jay Shambaugh

No 2006/037, IMF Working Papers from International Monetary Fund

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: WP; country interest rates; output-interest rate relationship; base interest rate effect; base country interest rates; less developed country; Exchange rate regime; international transmission; interest rates; interest rate channel; base country interest rate; interest rate movement; gap channel; country interest rate shock; interest rate coefficient; interest rate gap; Exchange rate arrangements; Production growth; Real interest rates; Exchange rate adjustments; Personal income; Global; Middle East (search for similar items in EconPapers)
Pages: 46
Date: 2006-02-01
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Citations: View citations in EconPapers (12)

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Related works:
Journal Article: The impact of foreign interest rates on the economy: The role of the exchange rate regime (2008) Downloads
Working Paper: The Impact of Foreign Interest Rates on the Economy: The Role of the Exchange Rate Regime (2007) Downloads
Working Paper: The Impact of Foreign Interest Rates on the Economy: The Role of the Exchange Rate Regime (2006) Downloads
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