Description: Global Transmission of Interest Rates : Monetary Independence and the Currency Regime

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Global Transmission of Interest Rates : Monetary Independence and the Currency Regime

The authors empirically study the sensitivity of local interest rates to international interest rates and how that sensitivity is affected by a country's choice of exchange rate regime. To establish the empirical regularities, they use a reduc...

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Bibliographic Details
Main Authors:	Frankel, Jeffrey, Schmukler, Sergio L., Serven, Luis
Language:	English en_US
Published:	World Bank, Washington, DC 2014
Subjects:	BALANCE OF PAYMENTS BUSINESS CYCLES CAPITAL FLOWS CAPITAL MOBILITY COUNTRY SAMPLE COVERAGE CURRENCY BOARDS CURRENCY PREMIUM CURRENCY RISK DEVALUATION DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPING ECONOMIES DOMESTIC ECONOMY DOMESTIC INTEREST RATES DOMESTIC PRODUCTS EMERGING ECONOMIES EMERGING MARKETS EMPIRICAL EVIDENCE EMPIRICAL STUDIES EMPLOYMENT EXCHANGE RATE EXCHANGE RATE ARRANGEMENTS EXCHANGE RATE CRISES EXCHANGE RATE REGIME EXCHANGE RATE REGIMES EXCHANGE RATE RISK EXCHANGE RATES FINANCIAL INTEGRATION FINANCIAL MARKETS FIXED EXCHANGE RATE FIXED EXCHANGE RATES FLOATING EXCHANGE RATE FOREIGN EXCHANGE FOREIGN INFLATION FOREIGN INTEREST RATE FOREIGN INTEREST RATES FUTURE RESEARCH INCOME INCOME COUNTRIES INCOME DEVELOPING COUNTRIES INCOME GROUP INDUSTRIAL COUNTRIES INDUSTRIAL ECONOMIES INFLATION RATES INTEREST RATES INTERMEDIATE REGIMES INTERNATIONAL CAPITAL FLOWS INTERNATIONAL MONETARY FUND LOCAL CURRENCY MACROECONOMICS MARKET FORCES MONETARY AREA MONETARY ECONOMICS MONETARY EXPANSION MONETARY POLICY MONETARY UNION MONEY SUPPLY NOMINAL ANCHOR NOMINAL EXCHANGE RATE NOMINAL INTEREST RATE NOMINAL INTEREST RATES POLICY RESEARCH RISK PREMIUM TRANSACTIONS COSTS TRANSMISSION PROCESS
Online Access:	http://documents.worldbank.org/curated/en/2000/08/693335/global-transmission-interest-rates-monetary-independence-currency-regime http://hdl.handle.net/10986/19808

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Summary:	The authors empirically study the sensitivity of local interest rates to international interest rates and how that sensitivity is affected by a country's choice of exchange rate regime. To establish the empirical regularities, they use a reduced-form empirical approach to compute both panel and single-country estimates of interest rate sensitivity for a large sample of developing and industrial economies between 1970 and 1999. When using the full sample, they find that: 1) Interest rates are typically lower in economies with fixed exchange rates than in those with flexible exchange rates. 2) More rigid currency regimes tend to exhibit higher transmission than more flexible regimes. In many cases in the 1990s, however, the authors cannot reject full transmission (a slope coefficient equal to 1), even for several countries with floating regimes. The data suggest an upward time trend in the degree to which domestic interest rates are sensitive to international capital movements and developing economies' increased financial integration with the rest of the world. As a result, country-specific estimates for the 1990s reveal few cases of less-than-full transmission of international interest rates to domestic rates, regardless of the currency regime. Country-specific results suggest that only large industrial countries can (or choose to) benefit from independent monetary policy. During the 1990s, interest rates in European countries were fully sensitive to German interest rates but insensitive to U.S. interest rates.