Real Interest Parity in the EU and the Consequences for Euro Area Membership: Panel Data Evidence, 1979-2005
AbstractThis paper examines whether macroeconomic convergence is an automatic outcome of forming a currency union by combining an analysis of real interest parity (RIP) in the EU with the argument for the endogeneity of the Optimum Currency Area (OCA) criteria. Using the DF-GLS and the CIPS* panel unit root test, RIP is tested for a sample of Euro area and non-Euro area EU member states with respect to Germany for key sub-periods covering 1979 M3 ? 2005 M12. RIP is not found to hold for most of the sample between 1979 M3 and 1998 M12. There is evidence in favour of RIP for most of the Euro area sample during the 1999 M1 ? 2005 M12 sub-period, exceptions being Ireland, Italy and Spain. RIP does not hold for any of the non-Euro area countries during the same period. This indicates some support for the endogeneity hypothesis, with the caveat that certain country-specific issues can seriously hinder the ?automatic? integration process.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Economic and Social Research Institute (ESRI) in its series Papers with number WP183.
Length: 35 pages
Date of creation: Mar 2007
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-08-14 (All new papers)
- NEP-CBA-2007-08-14 (Central Banking)
- NEP-EEC-2007-08-14 (European Economics)
- NEP-MAC-2007-08-14 (Macroeconomics)
- NEP-MON-2007-08-14 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Frankel, Jeffrey A & Rose, Andrew K, 1998.
"The Endogeneity of the Optimum Currency Area Criteria,"
Royal Economic Society, vol. 108(449), pages 1009-25, July.
- Jeffrey A. Frankel & Andrew K. Rose, 1996. "The Endogeneity of the Optimum Currency Area Criteria," NBER Working Papers 5700, National Bureau of Economic Research, Inc.
- Frankel, Jeffrey A & Rose, Andrew K, 1996. "The Endogeneity of the Optimum Currency Area Criteria," CEPR Discussion Papers 1473, C.E.P.R. Discussion Papers.
- S. Young Chung & William J. Crowder, 2004. "Why Are Real Interest Rates Not Equalized Internationally?," Southern Economic Journal, Southern Economic Association, vol. 71(2), pages 441-458, October.
- Graham Elliott & Thomas J. Rothenberg & James H. Stock, 1992.
"Efficient Tests for an Autoregressive Unit Root,"
NBER Technical Working Papers
0130, National Bureau of Economic Research, Inc.
- Paul de Grauwe & Francesco Paolo Mongelli, 2005.
"Endogeneities of Optimum Currency Areas: What brings Countries Sharing a Single Currency Closer together?,"
Working Papers de Economia (Economics Working Papers)
29, Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro.
- De Grauwe, Paul & Mongelli, Francesco Paolo, 2005. "Endogeneities of optimum currency areas: what brings countries sharing a single currency closer together?," Working Paper Series 0468, European Central Bank.
- Papell, David H., 2002.
"The great appreciation, the great depreciation, and the purchasing power parity hypothesis,"
Journal of International Economics,
Elsevier, vol. 57(1), pages 51-82, June.
- David Papell, 1998. "The Great Appreciation, the Great Depreciation, and the Purchasing Power Parity Hypothesis," Working Papers 30, Oesterreichische Nationalbank (Austrian Central Bank).
- Hughes Hallett, A. & Piscitelli, Laura, 2002. "Does trade integration cause convergence?," Economics Letters, Elsevier, vol. 75(2), pages 165-170, April.
- Pasaran, M.H. & Im, K.S. & Shin, Y., 1995.
"Testing for Unit Roots in Heterogeneous Panels,"
Cambridge Working Papers in Economics
9526, Faculty of Economics, University of Cambridge.
- M. Hashem Pesaran, 2007.
"A simple panel unit root test in the presence of cross-section dependence,"
Journal of Applied Econometrics,
John Wiley & Sons, Ltd., vol. 22(2), pages 265-312.
- Pesaran, M.H., 2003. "A Simple Panel Unit Root Test in the Presence of Cross Section Dependence," Cambridge Working Papers in Economics 0346, Faculty of Economics, University of Cambridge.
- Mishkin, Frederic S, 1984.
" Are Real Interest Rates Equal across Countries? An Empirical Investigation of International Parity Conditions,"
Journal of Finance,
American Finance Association, vol. 39(5), pages 1345-57, December.
- Frederic S. Mishkin, 1982. "Are Real Interest Rates Equal Across Countries? An Empirical Investigation of International Parity Conditions," NBER Working Papers 1048, National Bureau of Economic Research, Inc.
- Lothian, James R & Taylor, Mark P, 1996. "Real Exchange Rate Behavior: The Recent Float from the Perspective of the Past Two Centuries," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 488-509, June.
- Frankel, Jeffrey A, 1992. "Measuring International Capital Mobility: A Review," American Economic Review, American Economic Association, vol. 82(2), pages 197-202, May.
- Mark, Nelson C., 1985. "Some evidence on the international inequality of real interest rates," Journal of International Money and Finance, Elsevier, vol. 4(2), pages 189-208, June.
- Hansen, Bruce E., 1995.
"Rethinking the Univariate Approach to Unit Root Testing: Using Covariates to Increase Power,"
Cambridge University Press, vol. 11(05), pages 1148-1171, October.
- Bruce E. Hansen, 1995. "Rethinking the Univariate Approach to Unit Root Testing: Using Covariates to Increase Power," Boston College Working Papers in Economics 300., Boston College Department of Economics.
- Jorion, Philippe, 1996. "Does real interest parity hold at longer maturities?," Journal of International Economics, Elsevier, vol. 40(1-2), pages 105-126, February.
- Van Poeck, Andre & Van Gompel, Johan, 1994. "Dominant interest and inflation differentials within the EMS: A comment," European Economic Review, Elsevier, vol. 38(8), pages 1661-1663, October.
- Stilianos Fountas & Jyh-lin Wu, 1998.
"Testing for Real Interest Rate Convergence in European Countries,"
24, National University of Ireland Galway, Department of Economics, revised 1998.
- Fountas, Stilianos & Wu, Jyh-lin, 1999. "Testing for Real Interest Rate Convergence in European Countries," Scottish Journal of Political Economy, Scottish Economic Society, vol. 46(2), pages 158-74, May.
- Sibert, Anne & Sutherland, Alan, 2000. "Monetary union and labor market reform," Journal of International Economics, Elsevier, vol. 51(2), pages 421-435, August.
- Jyh-Lin Wu & Show-Lin Chen, 1998. "A Re-examination of Real Interest Rate Parity," Canadian Journal of Economics, Canadian Economics Association, vol. 31(4), pages 837-851, November.
- Breuer, Janice Boucher & McNown, Robert & Wallace, Myles S, 2001. "Misleading Inferences from Panel Unit-Root Tests with an Illustration from Purchasing Power Parity," Review of International Economics, Wiley Blackwell, vol. 9(3), pages 482-93, August.
- Kpate ADJAOUTÉ & Jean-Pierre DANTHINE, 2003. "European Financial Integration and Equity Returns: A Theory-Based Assessment," FAME Research Paper Series rp84, International Center for Financial Asset Management and Engineering.
- Bernd Hayo & Volker Clausen, 2002.
"Asymmetric Monetary Policy Effects in EMU,"
- Robert E. Cumby & Frederic S. Mishkin, 1987.
"The International Linkage of Real Interest Rates: The European - U.S. Connection,"
NBER Working Papers
1423, National Bureau of Economic Research, Inc.
- 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.
- Alejandro Micco & Ernesto H. Stein & Guillermo Luis Ordoñez, 2003.
"The Currency Union Effect on Trade: Early Evidence from EMU,"
Research Department Publications
4339, Inter-American Development Bank, Research Department.
- Alejandro Micco & Ernesto Stein & Guillermo OrdoÒez, 2003. "The currency union effect on trade: early evidence from EMU," Economic Policy, CEPR & CES & MSH, vol. 18(37), pages 315-356, October.
- Rose, Andrew K & Engel, Charles, 2002.
"Currency Unions and International Integration,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 34(4), pages 1067-89, November.
- Andrew K. Rose & Charles Engel, 2000. "Currency Unions and International Integration," NBER Working Papers 7872, National Bureau of Economic Research, Inc.
- Engel, Charles M & Rose, Andrew K, 2001. "Currency Unions and International Integration," CEPR Discussion Papers 2659, C.E.P.R. Discussion Papers.
- Diego Puga, 2002.
"European regional policies in light of recent location theories,"
Journal of Economic Geography,
Oxford University Press, vol. 2(4), pages 373-406, October.
- Puga, Diego, 2001. "European Regional Policies in Light of Recent Location Theories," CEPR Discussion Papers 2767, C.E.P.R. Discussion Papers.
- Al Awad, Mouawiya & Goodwin, Barry K., 1998. "Dynamic linkages among real interest rates in international capital markets," Journal of International Money and Finance, Elsevier, vol. 17(6), pages 881-907, December.
- Thom, Rodney & Walsh, Brendan, 2002. "The effect of a currency union on trade: Lessons from the Irish experience," European Economic Review, Elsevier, vol. 46(6), pages 1111-1123, June.
- Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002.
"Unit root tests in panel data: asymptotic and finite-sample properties,"
Journal of Econometrics,
Elsevier, vol. 108(1), pages 1-24, May.
- Tom Doan, . "LEVINLIN: RATS procedure to perform Levin-Lin-Chu test for unit roots in panel data," Statistical Software Components RTS00242, Boston College Department of Economics.
- Krugman, Paul & Venables, Anthony J., 1996.
"Integration, specialization, and adjustment,"
European Economic Review,
Elsevier, vol. 40(3-5), pages 959-967, April.
- Holmes, Mark J., 2002. "Does long-run real interest parity hold among EU countries? Some new panel data evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(4), pages 733-746.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sarah Burns).
If references are entirely missing, you can add them using this form.