Working Paper: NBER ID: w13467
Authors: Julian Di Giovanni; Jay C. Shambaugh
Abstract: It is often argued that many economies are affected by conditions in foreign countries. 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 foreign 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 major-country interest rates affect other economies. The effect of foreign interest rates on domestic interest rates is the most likely channel when compared with other possibilities, such as a trade effect.
Keywords: foreign interest rates; GDP growth; exchange rate regime; monetary policy
JEL Codes: F3; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Foreign interest rates (E43) | Domestic GDP growth (E20) |
| Base country interest rates (E43) | Domestic interest rates (E43) |
| Domestic interest rates (E43) | Domestic GDP growth (E20) |
| Foreign interest rates (E43) | Domestic GDP growth (pegged countries) (O57) |
| Foreign interest rates (E43) | Domestic GDP growth (floating countries) (O57) |
| Foreign interest rates (E43) | Domestic interest rates (pegged countries) (E43) |
| Foreign interest rates (E43) | Domestic interest rates (floating countries) (E43) |