تاثیر نرخ بهره خارجی بر اقتصاد: نقش رژیم نرخ ارز

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.

Discussions of globalization often assert that the fortunes of many countries are driven by other major economies. Conventional wisdom holds that conditions in major countries often spill over to other economies, which then experience volatility for reasons independent of domestic policies (e.g., International Monetary Fund, 2007). One manifestation of this idea is that major country interest rates have a strong impact on conditions in other countries. At the same time, the open economy “trilemma” and empirical tests of it suggest that only countries with pegged exchange rate regimes give up their domestic monetary autonomy.1 This loss of autonomy then implies a potential channel through which foreign interest rates can affect pegs and floats differently, with pegs being directly affected by foreign interest rates and floats insulated from these rates.2 This paper answers two questions. First, what is the effect of interest rates in base countries on other countries' annual real GDP growth?3 Second, how does this effect vary by the exchange rate regime and other country characteristics? Answering the second question helps to disentangle the channels through which foreign country interest rates affect other economies. We find that annual real output growth in countries is negatively associated with interest rates in their base countries, but that this effect holds only for countries with fixed exchange rates. This finding holds across a wide set of specifications, a variety of controls for time and base-and domestic-country characteristics, and various sub-samples. The results are also robust to concerns of endogeneity of exchange rate regimes, as well as other simultaneity concerns, such as correlated shocks across the base and domestic countries.4 In addition, the results are presented across different empirical models (fixed effect panel and random coefficients models) and hold even more strongly when using investment growth rather than GDP growth. The main finding thus implies that there are real costs to the loss of monetary autonomy that comes with pegging and provides further support for the hypothesis that interest rates can have substantial effects on the real economy. There may be benefits to pegging, but changing the interest rate to maintain the peg will have consequences for the economy. Specifically, base-country interest rates that are 1 percentage point higher lead to a 0.20 percentage point decline in annual GDP growth in pegged countries as opposed to no change in countries with floats. Turning to the channels underlying this result, we find that base rates have an impact on domestic interest rates and the impact is much stronger for pegs, while they do not appear to have an effect on variables such as exports to the base country. These findings, along with the differences seen across exchange rate regimes, suggest that the direct interest rate channel may be the primary channel through which base interest rates affect other countries, and are consistent with recent evidence that while many countries may show “fear of floating,” interest rates in countries that actually do float show far less connection to base interest rates than countries that peg (Shambaugh, 2004, Obstfeld et al., 2004 and Obstfeld et al., 2005). This paper is related to two literatures: (i) the impact of domestic monetary policy on the economy, and (ii) the impact of major economies on other countries' business cycles. While not studying monetary policy per se, we are interested in the way interest rates affect the economy. There is an extensive literature on the impact of domestic monetary policy on the economy, which is too broad to distill here.5 One paper that is related to the present study, however, is di Giovanni, McCrary and von Wachter (2005), who use the EMS/ERM period as a quasi-experimental setting to test for the causal impact of domestic monetary policy by instrumenting other European interest rates with the German one in order to test for the impact of domestic monetary policy, and find a strong effect.6 The literature on how industrial countries affect less-developed countries' economies is also relevant. Dornbusch (1985) considers the role of large country business cycles in determining commodity prices and, subsequently, other outcomes for less-developed countries. Recently, Neumeyer and Perri (2005) analyze the role of fluctuations in domestic interest rates on the business cycle of small open economies, where the interest rate is decomposed into an international rate and a country risk component. There have also been several attempts to untangle the impact of large country interest rates on domestic annual GDP growth. Reinhart and Reinhart (2001) consider a variety of North–South links when examining Group of Three (G-3) interest rate and exchange rate volatility, and find that the U.S. real interest rate affects growth in some regions. Frankel and Roubini (2001) also find a negative effect of G-7 real interest rates on less-developed countries' output. Since these papers consider many aspects of North–South relations, they do not have space to consider in detail how major-country interest rates and the domestic economy are connected. In addition to these studies, there have been a number of papers that use vector autoregressions (VARs) to explore the transmission of international business cycles.7 A notable contribution is Kim (2001), who finds that U.S. interest rates have an impact on output in the other six G-7 countries. This paper is one of the few to examine the potential channels through which the interest rate has an effect. It finds virtually no trade impact and that the impact on output comes from a reduction in the world interest rate.8 What has been absent from the study of foreign rates' impact on the real economy, though, is conditioning on the role of the exchange rate regime in the transmission of the foreign interest rate on the domestic economy.9 The present paper uncovers the impact of major country interest rates on other countries while paying particular attention to the way the exchange rate regime may affect the transmission. By including a broad panel of countries that have different base countries, the present study uses time controls and focuses on the specific effect of the base interest rate. Thus, our panel allows us to strip out both individual country effects and worldwide movements in growth rates providing a better identification strategy. We confirm the results by moving beyond standard panel analysis, using a random coefficient model which allows us to use a variety of controls and test why some countries experience more of an impact from foreign interest rates. We consistently find the exchange rate regime is the factor driving the magnitude of countries' response to base interest rates.10 Section 2 describes the empirical framework and any potential bias concerns. Section 3 presents the data and results. Section 4 concludes

This paper shows that while interest rates in base countries may have an effect on other countries' real economies, this impact only exists for pegged countries. Countries without a fixed exchange rate show no relationship between annual real GDP growth and the base interest rate, but countries with a fixed exchange rate grow 0.1 to 0.2 percentage points slower when base interest rates are 1 percentage point higher. The results appear robust to a wide variety of controls and specifications. Controlling for time, region, income, base country GDP growth, and other controls all present the same picture. In addition, pegged countries do not respond to any world interest rate, but only the rate of the country to which they peg — further suggesting the importance of the peg in this relationship. We have exploited variation in base rates and used RCM techniques to achieve better identification and increase confidence in the robustness of the results. As discussed in the methodology section, it is possible that shocks affect both base interest rates and local GDP growth simultaneously, but we have tried to control for these by including year effects (to capture worldwide shocks), base GDP growth (to capture real shocks in the base) and oil shocks as well as using the more flexible RCM approach. Our work on channels suggests that the effect of the base interest rate on domestic interest rates in pegged countries is the primary channel through which this impact on GDP takes place. Pegged countries move their interest rates with the base country interest rates while floats do not. On the other hand, there does not seem to be a robust relationship consistent with the direction that growth moves between the base country interest rate and other potential channels such as the exchange rate, trade flows, and the interest rate spread over the base country. While the fact that the fixed exchange rate countries' growth rates move with the base interest rate matches our theoretical predictions, the results are surprising on two levels. First, the lack of a reaction in the floating countries runs counter to conventional wisdom regarding the extent to which large country interest rates affect the rest of the world. Second, with the findings that the primary channel is the direct interest rate channel, we add to our understanding of how and why foreign country interest rates matter for pegs and demonstrate that exogenous domestic monetary policy (moving local interest rates due to a move in exogenous foreign rates) can have a palpable effect on the economy. For many years, economists have struggled with the difficulty of finding robust macroeconomic relationships that vary across exchange rate regime. Recently, there has been additional work suggesting that monetary policy autonomy, growth, inflation, and trade may all vary with the exchange rate regime, at least to some extent. Stretching back further, Flood and Rose (1995) found a negative relationship between the exchange rate flexibility and output variability. The results here suggest that being forced to follow the base country's monetary policy even when it is not optimal for the domestic economy may cause increased volatility in GDP for fixed exchange rate countries. These results do not suggest that pegging is either a good or bad idea, but instead add to the calculus of costs and benefits (in this case costs) an economy will face when it fixes its exchange rate. Furthermore, our results suggest that losing monetary autonomy when pegging has real impacts on the economy. Obviously, by floating, a country may expose itself to volatility owing to changes in the nominal exchange rate, but pegging does not eliminate volatility. Pegging forces a country's interest rates to follow the base country rates, which may generate more volatility in GDP by eliminating countercyclical monetary policy as an option.