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Interest rate convergence in the EMS prior to European Monetary Union

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Author Info

  • Michael Frömmel

    (Ghent University)

  • Robinson Kruse

    ()
    (Aarhus University and CREATES)

Abstract

In this paper we analyze the convergence of interest rates in the European Monetary System (EMS) in a framework of changing persistence. This allows us to estimate the exact date of full convergence from the data. A change in persistence means that a time series switches from stationarity to non-stationarity, or vice versa. It is often argued that due to the specific historical situation in the EMS the interest rate differential was non-stationary before the full convergence of interest rates was achieved and stationary afterwards. Our empirical results suggest that the convergence date has been very different for Belgium, France, the Netherlands and Italy and are in line with the conclusions one would draw from a narrative approach. We compare three different estimators for the convergence date and find that the results are quite robust. Our results therefore stress the importance of credibility for monetary policy.

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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2009-23.

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Length: 26
Date of creation: 02 Jun 2009
Date of revision:
Handle: RePEc:aah:create:2009-23

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Web page: http://www.econ.au.dk/afn/

Related research

Keywords: Interest rates; convergence; changing persistence; EMS; EMU;

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References

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  1. Busetti, Fabio & Taylor, A. M. Robert, 2004. "Tests of stationarity against a change in persistence," Journal of Econometrics, Elsevier, Elsevier, vol. 123(1), pages 33-66, November.
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  3. Kim, Jae-Young & Belaire-Franch, Jorge & Amador, Rosa Badillo, 2002. "Corrigendum to "Detection of change in persistence of a linear time series" [J. Econom. 95 (2000) 97-116]," Journal of Econometrics, Elsevier, Elsevier, vol. 109(2), pages 389-392, August.
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  8. Shively, Philip A., 2000. "Stationary time-varying risk premia in forward foreign exchange rates," Journal of International Money and Finance, Elsevier, Elsevier, vol. 19(2), pages 273-288, April.
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  21. Michael Frömmel & Lukas Menkhoff, 2001. "Risk Reduction in the EMS? Evidence from Trends in Exchange Rate Properties," Journal of Common Market Studies, Wiley Blackwell, Wiley Blackwell, vol. 39(2), pages 285-306, 06.
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Citations

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Cited by:
  1. Schmid, Kai Daniel & Schmidt, Michael, 2012. "EMU, the changing role of public debt and the revival of sovereign credit risk perception," University of Tuebingen Working Papers in Economics and Finance, University of Tuebingen, Faculty of Economics and Social Sciences 48, University of Tuebingen, Faculty of Economics and Social Sciences.
  2. Ingo G. Bordon & Kai Daniel Schmid & Michael Schmidt, 2014. "Hypnosis Before Wake-up Call? The Revival of Sovereign Credit Risk Perception in the EMU-Crisis," IMK Working Paper, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute 138-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  3. Sibbertsen, Philipp & Wegener, Christoph & Basse, Tobias, 2013. "Testing for a Break in the Persistence in Yield Spreads of EMU Government Bonds," Hannover Economic Papers (HEP), Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät dp-517, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  4. Kai Daniel Schmid & Michael Schmidt, 2012. "EMU and the Renaissance of Sovereign Credit Risk Perception," IAW Discussion Papers, Institut für Angewandte Wirtschaftsforschung (IAW) 87, Institut für Angewandte Wirtschaftsforschung (IAW).

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