The Transmission of Foreign Interest Rate Shocks to a Small-Open Economy: The Role of External Debt and Financial Integration

Ufuk Demirel

The B.E. Journal of Macroeconomics, 2009, vol. 9, issue 1, 37

Abstract: This paper investigates the implications of external indebtedness and international financial integration on the effects of foreign interest rate shocks in a small-open economy. The empirical component of the analysis quantifies the effects of U.S. interest rate shocks on the Turkish economy. The theoretical component constructs a business cycle model that can successfully match the empirical impulse response functions. The model is estimated on quarterly Turkish data. It is found that the relationship between financial integration and macroeconomic volatility due to foreign interest rate shocks depends on the level of outstanding external debt. Financial integration mitigates the economy's responses to foreign rate shocks for higher levels of external debt and it magnifies the responses for lower levels of external debt.

Keywords: financial integration; external debt; foreign shock transmission; Turkish economy (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (4)

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DOI: 10.2202/1935-1690.1776

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