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Do real interest rates converge? Evidence from the European Union

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  • Michael G. Arghyrou
  • Andros Gregoriou
  • Alexandros Kontonikas

Abstract

We test for real interest parity (RIP) in the EU25 area. Our contribution is two-fold: First, we account for the previously overlooked effects of structural breaks on real interest rate differentials. Second, we test for RIP against the EMU average. For the majority of our sample countries we obtain evidence of real interest rate convergence towards the latter. Convergence, however, is a gradual process subject to structural breaks, typically falling close to the launch of the euro. Our findings have important implications relating to the single monetary policy and the progress new EU members have achieved towards joining the euro.

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Bibliographic Info

Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2007_21.

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Date of creation: Jun 2007
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Handle: RePEc:gla:glaewp:2007_21

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Keywords: real interest rate parity; convergence; structural breaks; EU; EMU;

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