Working Paper: NBER ID: w8828
Authors: Jeffrey A. Frankel; Sergio L. Schmukler; Luis Servén
Abstract: Using a large sample of developing and industrialized economies during 1970-1999, this paper explores whether the choice of exchange rate regime affects the sensitivity of local interest rates to international interest rates. In most cases, we cannot reject full transmission of international interest rates in the long run, even for countries with floating regimes. Only large industrial countries can benefit, or choose to benefit, from independent monetary policy. However, short-run effects differ across regimes. Dynamic estimates show that interest rates of countries with more flexible regimes adjust more slowly to changes in international rates.
Keywords: No keywords provided
JEL Codes: F31; F32; F33; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| domestic nominal interest rates (E43) | international interest rates (E43) |
| flexible exchange rates (F31) | less sensitivity of domestic interest rates to international rates (E43) |
| flexible exchange rates (F31) | greater monetary independence (E49) |
| increased flexibility in exchange rate regimes (F33) | reduced responsiveness of local rates to international changes (F49) |
| short-run effects vary across regimes (E65) | interest rates in more flexible regimes adjust more slowly to international changes (F33) |