Interest rates and price levels in a small open economy

• Authors: Vincze J.
• Languages of publication: HU

Abstracts

EN

The study examines what effects various interest rates have on the price level and nominal prices in an open (primarily small) economy with free flows of capital. A closed economy calls for a distinction only between nominal and real rates of interest, but in an open economy, questions of interest-rate parity have to be considered as well. It is necessary to clarify the factors behind the real interest rate important for price-level pass-through and for the scale of risk premium. Analysis of interest-rate effects begins with the mechanism whereby the interest rate influences the cost of fixed assets (explicit or implicit rents). Secondly, the mechanism behind the relation of export-sector production decisions and domestic interest rates is examined. It emerges that decisions of the export sector are independent of domestic interest rates. Thirdly, certain types of pricing behaviour are studied. It is shown that a rise in the interest rate that does not alter the present exchange rate is a price-raising factor for the importing country. It can be assumed that if the interest rate has a demand effect in a closed economy, this will presumably be much weaker in a small open economy.

Keywords

EN

COSTS; INTEREST RATES; OPEN ECONOMY; PRICES

Discipline

• ECONOMICS: ECONOMICS

• Publisher: Committee for Economic Sciences of the Hungarian Academy of Sciences
• Journal: Kozgazdasagi Szemle (Economic Review)
• Year: 2004
• Volume: 51
• Issue: 7/8
• Pages: 625-637
• Document type: ARTICLE

Contributors

author

Vincze J.

• J. Vincze, no address given, contact the journal editor

Identifiers

CEJSH db identifier

06HUAAAA00661674