Euro area states can benefit from an interest rate increase in the U.S. in the short term, a study released by the German Institute for Economic Research (DIW Berlin) on Wednesday showed.
A statement of DIW Berlin said hikes in the U.S. interest rate go hand in hand with the appreciation of the U.S. dollar, which automatically leads to a devaluation of the euro against the dollar.
Thanks to the devaluation of the euro, exports of euro area states would rise to the extent that they are able to overcompensate for the negative demand effect from the United States, it noted.
The increase in export demand caused by the devaluation of the euro would be able to trigger a short-term expansive effect before the interest rate hike counteracts the expansion in the euro area and slows down the economy's momentum, the Berlin-based think tank said.
"The positive effect would only be temporary. But our findings should reduce concerns that a hike in the U.S. benchmark interest rate would result in spillover effects and weaken the euro area economically," DIW economist Max Hanisch noted.
Meanwhile, DIW also stated that the DIW study is an empirical, structural analysis that examined the average relationship between the U.S. monetary policy and the euro area countries prevailing between 1999 and 2015. Alongside monetary policy, a number of other variables could influence economy in the euro area and the exchange rate.
A statement of DIW Berlin said hikes in the U.S. interest rate go hand in hand with the appreciation of the U.S. dollar, which automatically leads to a devaluation of the euro against the dollar.
Thanks to the devaluation of the euro, exports of euro area states would rise to the extent that they are able to overcompensate for the negative demand effect from the United States, it noted.
The increase in export demand caused by the devaluation of the euro would be able to trigger a short-term expansive effect before the interest rate hike counteracts the expansion in the euro area and slows down the economy's momentum, the Berlin-based think tank said.
"The positive effect would only be temporary. But our findings should reduce concerns that a hike in the U.S. benchmark interest rate would result in spillover effects and weaken the euro area economically," DIW economist Max Hanisch noted.
Meanwhile, DIW also stated that the DIW study is an empirical, structural analysis that examined the average relationship between the U.S. monetary policy and the euro area countries prevailing between 1999 and 2015. Alongside monetary policy, a number of other variables could influence economy in the euro area and the exchange rate.
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