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Does the euro dominate Central and Eastern European money markets?

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  • Kadow, Alexander
  • Cerrato, Mario
  • MacDonald, Ronald
  • Straetmans, Stefan

Abstract

The so-called German Dominance Hypothesis (GDH) claimed that Bundesbank policies were transmitted into other European Monetary System (EMS) interest rates during the pre-euro era. We reformulate this hypothesis for the Central and Eastern European (CEE) countries that are on the verge of accessing the eurozone. We test this “Euro Dominance Hypothesis (EDH)” in a novel way using a global vector autoregressive (GVAR) approach that combines country-specific error correction models in a global system. We find that euro area monetary policies are transmitted into CEE money market rates, providing evidence for monetary integration between the eurozone and CEE countries. Our framework also allows for introducing global monetary shocks to provide at least tentative empirical evidence regarding the effects of the recent financial crisis on monetary integration in Europe.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 32 (2013)
Issue (Month): C ()
Pages: 700-718

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Handle: RePEc:eee:jimfin:v:32:y:2013:i:c:p:700-718

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Web page: http://www.elsevier.com/locate/inca/30443

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Keywords: German Dominance Hypothesis; Global VAR; Central and Eastern Europe; Monetary integration;

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  1. Michele Fratianni & Juergen Hagen, 1990. "German dominance in the EMS," Open Economies Review, Springer, vol. 1(1), pages 67-87, February.
  2. Clive, W.J. & Lin, Jin-Lung, 1995. "Causality in the Long Run," Econometric Theory, Cambridge University Press, vol. 11(03), pages 530-536, June.
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