International Evidence on the Interest Rate Effect in Dynamic IS Curves

Sedjro Aaron Alovokpinhou, Pholile Dladla and Christopher Malikane

Emerging Markets Finance and Trade, 2024, vol. 60, issue 9, 1890-1907

Abstract: A number of studies have found little evidence of the effect of the interest rate in dynamic IS curves. We show that this is due to de-trending. The interest rate has a weak effect on the output gap even when controlling for wealth effects. However, when the IS curve is formulated in an error-correction form, we find a significant interest rate effect. Furthermore, we find that the nominal interest rate explains output dynamics better. Lastly, there are significant effects of long-term interest rates in emerging markets, which may justify the use of yield curve control policies in these economies.

Date: 2024
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DOI: 10.1080/1540496X.2023.2293973

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