NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Impact of Foreign Interest Rates on the Economy: The Role of the Exchange Rate Regime

Julian di Giovanni, Jay C. Shambaugh

NBER Working Paper No. 13467
Issued in October 2007
NBER Program(s):   IFM

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.

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Document Object Identifier (DOI): 10.3386/w13467

Published: di Giovanni, Julian & Shambaugh, Jay C., 2008. "The impact of foreign interest rates on the economy: The role of the exchange rate regime," Journal of International Economics, Elsevier, vol. 74(2), pages 341-361, March.

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