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Real interest parity, dynamic convergence and the European Monetary System

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  • Andrew G Haldane
  • Mahmood Pradhan

Abstract

Is further economic convergence between European Monetary System (EMS) member countries desirable? This paper addresses some of the convergence issues currently being raised in the debate over Economic and Monetary Union (EMU) in Europe, with particular emphasis on the behaviour of real interest rates. The important distinction between static and dynamic convergence is highlighted. A standard analytical framework is presented which illustrates the importance of the components of the real interest differential - namely capital controls, risk premia and the real exchange rate - as endogenous mechanisms for the transmission of policy. As such, variations in the real interest differential are shown potentially to be important for ensuring dynamic convergence to a steady-state EMU.

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File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1992/wp01.pdf
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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 1.

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Date of creation: Jun 1992
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Handle: RePEc:boe:boeewp:1

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Cited by:
  1. Camarero, Mariam, & FlĂ´res, R. & C. Tamarit, 2002. "Time series evidence of international output convergence in Mercosur," Computing in Economics and Finance 2002, Society for Computational Economics 87, Society for Computational Economics.
  2. Andrew G Haldane & Mahmood Pradhan, 1992. "Testing real interest parity in the European Monetary System," Bank of England working papers, Bank of England 2, Bank of England.
  3. Eijffinger, S.C.W. & Lemmen, J.J.G., 1994. "The catching up of European money markets: The degree vs. the speed of integration," Discussion Paper, Tilburg University, Center for Economic Research 1994-66, Tilburg University, Center for Economic Research.
  4. Mariam Camarero & Cecilio Tamarit, 1996. "Cointegration and the PPP and the UIP hypotheses: An application to the Spanish integration in the EC," Open Economies Review, Springer, Springer, vol. 7(1), pages 61-76, January.

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