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International Evidence on the Interest Rate Effect in Dynamic IS Curves

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  • Sedjro Aaron Alovokpinhou
  • Pholile Dladla
  • Christopher Malikane

Abstract

A number of studies have found little evidence of the effect of the interest rate in dynamic IS curves. We show that this is due to de-trending. The interest rate has a weak effect on the output gap even when controlling for wealth effects. However, when the IS curve is formulated in an error-correction form, we find a significant interest rate effect. Furthermore, we find that the nominal interest rate explains output dynamics better. Lastly, there are significant effects of long-term interest rates in emerging markets, which may justify the use of yield curve control policies in these economies.

Suggested Citation

  • Sedjro Aaron Alovokpinhou & Pholile Dladla & Christopher Malikane, 2024. "International Evidence on the Interest Rate Effect in Dynamic IS Curves," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 60(9), pages 1890-1907, July.
    • Handle: RePEc:mes:emfitr:v:60:y:2024:i:9:p:1890-1907
    DOI: 10.1080/1540496X.2023.2293973
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