The impact of U.S. interest rates on economic growth in emerging markets

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: The focus of this paper is on the relationship between U.S. interest rates and real GDP per capita growth in emerging markets. The analysis of the paper seeks to determine if the relationship is negative and non-linear in nature as postulated by the paper’s two hypotheses. Three panel data regressions using the same dependent variable, real GDP per capita growth rate, but different explanatory variables, various types of U.S. interest rates, generate results in support of the postulated negative relationship but rejecting the non- linearity of the negative relationship. This implies that the marginal negative effect on emerging market GDP growth from rising U.S. interest rates will be fairly constant and not depend on the level of the U.S. interest rates themselves. The most statistically significant results were generated by using the Federal Funds Rate as the explanatory variable whereas the 10 Year Maturity Treasury Yield generated the least statistically significant results. The findings of this paper suggest that if U.S. interest rates continue to rise the economic implications for emerging markets will be serious and potentially detrimental. Emerging markets with substantial dollar-denominated debt are especially at risk as rising U.S. interest rates will negatively affect both their exchange rate to the dollar as well as their financial standing and thereby attractiveness among global investors. Provided that the regression analysis was based on data starting in 1980 further research covering a longer time period starting prior to 1980 would be interesting since that would include more years when U.S. interest rates rose and not only fell as was mainly the case in this study.

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