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Testing real interest parity in the European Monetary System

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  • Andrew G Haldane
  • Mahmood Pradhan

Abstract

Current discussions on Economic and Monetary Union (EMU) in Europe have stressed the need for enhanced integration of goods and factor markets as a pre condition of moving as costlessly as possible to a single currency system. The real interest differential - and hence tests of real interest parity - provide a summary measure of the degree of residual integration necessary such that these conditions are met. Empirical tests suggest a rejection of real interest parity among European Monetary System (EMS) member countries, at least during recent years. Further, a decomposition of the differential suggests that imperfect integration of goods markets, as reflected in a failure of ex-ante PPP, is largely responsible for this finding.

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File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1992/wp02.pdf
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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 2.

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Date of creation: Jul 1992
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Handle: RePEc:boe:boeewp:2

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  1. Cumby, Robert E. & Mishkin, Frederic S., 1986. "The international linkage of real interest rates: The European-US connection," Journal of International Money and Finance, Elsevier, vol. 5(1), pages 5-23, March.
  2. Andrew G Haldane & Mahmood Pradhan, 1992. "Real interest parity, dynamic convergence and the European Monetary System," Bank of England working papers 1, Bank of England.
  3. Peek, Joe & Wilcox, James A, 1983. " The Postwar Stability of the Fisher Effect," Journal of Finance, American Finance Association, vol. 38(4), pages 1111-24, September.
  4. Batchelor, R. A., 1986. "The psychophysics of inflation," Journal of Economic Psychology, Elsevier, vol. 7(3), pages 269-290, September.
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Cited by:
  1. 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 1994-66, Tilburg University, Center for Economic Research.
  2. Lemmen, J.J.G. & Eijffinger, S.C.W., 1994. "The price approach to financial integration: Decomposing European money market interest rate differentials," Discussion Paper 1994-16, Tilburg University, Center for Economic Research.
  3. Darren Pain & Ryland Thomas, 1997. "Real Interest Rate Linkages: Testing for Common Trends and Cycles," Bank of England working papers 65, Bank of England.
  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, vol. 7(1), pages 61-76, January.
  5. Holmes, Mark J. & Maghrebi, Nabil, 2008. "Is there a connection between monetary unification and real economic integration? Evidence from regime-switching stationarity tests," Journal of International Money and Finance, Elsevier, vol. 27(6), pages 958-970, October.

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