TRANSMITTING SHOCKS TO THE ECONOMY: THE CONTRIBUTION OF INTEREST AND EXCHANGE RATES AND THE CREDIT CHANNEL

Edda Claus and Iris Claus ()

CAMA Working Papers from Australian National University, Centre for Applied Macroeconomic Analysis

Abstract: Understanding the transmission channels of shocks is critical for successful policy response. This paper develops a dynamic general equilibrium model to assess the relative importance of the interest rate, the exchange rate and the credit channels in transmitting shocks in an open economy. The relative contribution of each channel is determined by comparing the impulse responses when the relevant channel is suppressed with the impulse responses when all three channels are operating. The results suggest that all three channels contribute to business cycle fluctuations and the transmission of shocks to the economy. But the magnitude of the impact of the interest rate channel crucially depends on the inflation process and the structure of the economy.

JEL-codes: E32 E44 E50 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Date: Written 2007-02
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http://cama.anu.edu.au/Working%20Papers/Papers/2007/Claus_Claus_32007.pdf (application/pdf)

Related works:
Working Paper: Transmitting shocks to the economy: The contribution of interest and exchange rates and the credit channel (2007)
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