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...
| Main Authors: | , , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| 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 |
| 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. |
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