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Estimated Output, Price, Interest Rate, and Exchange Rate Linkages among Countries

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  • Fair, Ray C

Abstract

This paper provides quantitative estimates of the output, price, interest rate, and exchange rate linkages among a number of countries. The econometric model that is used for this purpose is described in Fair (1981), and the present paper is an extension of this work. The linkages are examined by changing various policy variables and observing the resulting change in the endogenous variables. The model is also used to estimate what is called the "exchange rate effect" on inflation. One of the ways in which monetary and fiscal policies may affect a country's inflation rate is by first influencing its exchange rate, which in turn influences import prices, which in turn influences domestic prices. The model allows this exchange rate effect on in£ lat ion to be estimated. The results in the paper give a good indication of the properties of the model. The linkages among countries are complicated and there are few unambiguous effects with respect to sign. This is true not just in principle but also in fact. Depreciation, for example, increases GNP for Japan, but decreases it for Germany and the U.K. A spending in- crease leads to a depreciation in Japan, but to an appreciation in Germany and the U.K. A spending increase in the U.S. has noticeably different effects on different countries. The results also show the importance of price, interest rate, and exchange rate linkages among countries as well as the usual trade linkages.
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  • Fair, Ray C, 1982. "Estimated Output, Price, Interest Rate, and Exchange Rate Linkages among Countries," Journal of Political Economy, University of Chicago Press, vol. 90(3), pages 507-535, June.
    • Handle: RePEc:ucp:jpolec:v:90:y:1982:i:3:p:507-35
    DOI: 10.1086/261072
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    References listed on IDEAS

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    1. repec:bla:scandj:v:78:y:1976:i:2:p:280-304 is not listed on IDEAS
    2. Ray C. Fair, 1981. "Estimated Effects of Relative Prices on Trade Shares," Cowles Foundation Discussion Papers 597, Cowles Foundation for Research in Economics, Yale University.
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    Cited by:

    1. Arash Habibi, 2019. "Non-linear impact of exchange rate changes on U.S. industrial production," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 8(1), pages 1-17, December.
    2. Joaquín Pi Anguita, 1990. "Política macroeconómica en uniones monetarias," Investigaciones Economicas, Fundación SEPI, vol. 14(2), pages 213-224, May.
    3. Helliwell, John F. & Padmore, Tim, 1985. "Empirical studies of macroeconomic interdependence," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 21, pages 1107-1151, Elsevier.
    4. Fukuda, Shin-ichi, 2004. "Extraneous shocks and international linkage of business cycles in a two-country monetary model," Journal of Economic Behavior & Organization, Elsevier, vol. 54(3), pages 389-409, July.
    5. Galy, Michel, 1982. "Regional exchange rate arrangements in a world of floating rates: The experience of the EMS," MPRA Paper 62293, University Library of Munich, Germany.
    6. Jaime R. Marquez, 1984. "Oil price effects in theory and practice," International Finance Discussion Papers 237, Board of Governors of the Federal Reserve System (U.S.).
    7. Miller, Norman C., 1995. "Towards a loanable funds/amended-liquidity preference theory of the exchange rate and interest rate," Journal of International Money and Finance, Elsevier, vol. 14(2), pages 225-245, April.

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