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Macroeconomic instability in the European monetary system?

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Author Info
A. Morales-Zumaquero
Simon Sosvilla-Rivero

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Abstract

This article analyses the impact of the establishment of the European Monetary System (EMS) on a number of macroeconomic variables, such as exchange rates, money, interest rates and prices for member countries participating in the Exchange Rate Mechanism (ERM). Instability is examined in terms of multiple structural breaks in the variance of the series. Two procedures are followed for this purpose: the OLS-based tests to detect multiple structural breaks, as proposed by Bai and Perron (1998, 2003), and several procedures based on Information Criterion together with the so-called sequential procedure suggested by Bai and Perron (2003). Results indicate that there is some evidence of structural breaks in volatility across investigated variables, with the realignments in the ERM playing a significant role in reducing volatility in some countries and sub-periods. In this regard, the results tend to support the hypothesis that the EMS has contributed to reducing macroeconomic volatility in member countries.

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Article provided by Taylor and Francis Journals in its journal Applied Financial Economics.

Volume (Year): 18 (2008)
Issue (Month): 12 ()
Pages: 965-983
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Handle: RePEc:taf:apfiec:v:18:y:2008:i:12:p:965-983

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  7. Berger, Helge & Sturm, Jan-Egbert & Haan, Jakob de, 2000. "An Empirical Investigation into Exchange Rate Regime Choice and Exchange Rate Volatility," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  10. Frenkel, Jacob A & Mussa, Michael L, 1980. "The Efficiency of Foreign Exchange Markets and Measures of Turbulence," American Economic Review, American Economic Association, vol. 70(2), pages 374-81, May. [Downloadable!] (restricted)
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  12. Sosvilla-Rivero, Simon & Fernandez-Rodriguez, Fernando & Bajo-Rubio, Oscar, 1999. "Exchange Rate Volatility in the EMS before and after the Fall," Applied Economics Letters, Taylor and Francis Journals, vol. 6(11), pages 717-22, November. [Downloadable!] (restricted)
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  16. Francisco Ledesma-Rodríguez & Manuel Navarro-Ibáñez & Jorge Pérez-Rodríguez & Simón Sosvilla-Rivero, 2005. "Assessing the credibility of a target zone: evidence from the EMS," Applied Economics, Taylor and Francis Journals, vol. 37(19), pages 2265-2287, October. [Downloadable!] (restricted)
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  17. Hu, Michael Y. & Jiang, Christine X. & Tsoukalas, Christos, 1997. "The European exchange rates before and after the establishment of the European Monetary System," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 7(3), pages 235-253, October. [Downloadable!] (restricted)
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  20. Juan Ayuso Huertas, 1995. "Is there a Trade-Off Between Exchange Rate Risk and Interest Rate Risk?," Banco de España Working Papers 9529, Banco de España.
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  22. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July. [Downloadable!] (restricted)
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