The EMS was founded with the aim of promoting economic integration by stabilizing exchange rates. This study shows that the main effect of the EMS was lowering of the short-term volatility of nominal and real bilateral exchange rates. Theoretical considerations as well as empirical findings do not give any clear evidence that the EMS has improved goods market integration via enhanced trade. Exchange rate stability could also promote capital market integration and capital mobility. A comparison of nominal and real return differentials does not provide any evidence of significant effects of the EMS on capital market integration.
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Article provided by Department of Economics, Economics I, Bayreuth University in its journal Macroeconomics.