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Asymmetry in the EMS revisited: Evidence from the Causality Analysis of Daily Eurorates

  • Jérôme HENRY
  • Jens WEIDMANN

We use non-stationary econometrics to analyze asymmetry and dominance within the EMS through interest rate linkages from April 1983 to the end of 1992. Daily data (French, German and US one-month Eurorates) are used for their better suitability to the analysis of causality. We first show there is a break in the long-run structure of the system of interest rates: two sub-periods are therefore analyzed, before and after German unification. Three concepts of causality are then tested: causality in short-run dynamics and long-run exogeneity in the VAR representation as well as long-run impulse-response in the MA representation. On both sub-periods, tests confirm the French rate is submitted to the German dominance in the short-run. Posterior to the unification, the German interest rate dynamics does not even depend on that of the US rate. The MA analysis also shows the trends driving the system come from the US and the German rates prior to unification, but only from the latter afterwards.

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Article provided by ENSAE in its journal Annals of Economics and Statistics.

Volume (Year): (1995)
Issue (Month): 40 ()
Pages: 125-160

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Handle: RePEc:adr:anecst:y:1995:i:40:p:06
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  1. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Technical Working Papers 0100, National Bureau of Economic Research, Inc.
  2. De Grauwe, Paul, 1989. "Is the European Monetary System a DM-Zone?," CEPR Discussion Papers 297, C.E.P.R. Discussion Papers.
  3. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
  4. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
  5. Dolado, Juan J & Jenkinson, Tim & Sosvilla-Rivero, Simon, 1990. " Cointegration and Unit Roots," Journal of Economic Surveys, Wiley Blackwell, vol. 4(3), pages 249-73.
  6. Diebold, Francis X & Gardeazabal, Javier & Yilmaz, Kamil, 1994. " On Cointegration and Exchange Rate Dynamics," Journal of Finance, American Finance Association, vol. 49(2), pages 727-35, June.
  7. Dickey, David A & Pantula, Sastry G, 1987. "Determining the Ordering of Differencing in Autoregressive Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(4), pages 455-61, October.
  8. Chow, Gregory C, 1993. "A Two-Step Procedure for Estimating Linear Simultaneous Equations with Unit Roots," The Review of Economics and Statistics, MIT Press, vol. 75(1), pages 107-11, February.
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