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The Term Structure of Interest Rates and Financial Integration in the ERM


  • Holmes, Mark J
  • Pentecost, Eric J


In this paper we examine the relationship between the term structure of interest rates for six major European Union countries, to discover if the Exchange Rate Mechanism has lead to a converging of domestic term structures. We test this hypothesis using a model of international interest rate parity and three alternative econometric methods. We find that there is evidence of inter-dependence of domestic term structures implying that not only are European monetary polices converging but also that the appropriate model of the term structure is one with an explicit open economy dimension. Copyright @ 1997 by John Wiley & Sons, Ltd. All rights reserved.

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  • Holmes, Mark J & Pentecost, Eric J, 1997. "The Term Structure of Interest Rates and Financial Integration in the ERM," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 2(3), pages 237-247, July.
  • Handle: RePEc:ijf:ijfiec:v:2:y:1997:i:3:p:237-47

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    References listed on IDEAS

    1. Charles R. Bean, 1992. "Economic and Monetary Union in Europe," Journal of Economic Perspectives, American Economic Association, vol. 6(4), pages 31-52, Fall.
    2. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Chapters,in: NBER Macroeconomics Annual 1991, Volume 6, pages 141-220 National Bureau of Economic Research, Inc.
    3. De Grauwe, Paul, 1992. "Inflation Convergence During the Transition to EMU," CEPR Discussion Papers 658, C.E.P.R. Discussion Papers.
    4. Baxter, Marianne & Stockman, Alan C., 1989. "Business cycles and the exchange-rate regime : Some international evidence," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 377-400, May.
    5. Quah, Danny, 1995. "Empirics for Economic Growth and Convergence," CEPR Discussion Papers 1140, C.E.P.R. Discussion Papers.
    6. Robert J. Barro & Xavier Sala-i-Martin, 1991. "Convergence across States and Regions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(1), pages 107-182.
    7. Bayoumi, Tamim & Masson, Paul R., 1995. "Fiscal flows in the United States and Canada: Lessons for monetary union in Europe," European Economic Review, Elsevier, vol. 39(2), pages 253-274, February.
    8. De Grauwe, Paul, 1995. "The Economics of Convergence towards Monetary Union in Europe," CEPR Discussion Papers 1213, C.E.P.R. Discussion Papers.
    9. Quah, Danny, 1995. "Empirics for economic growth and convergence," LSE Research Online Documents on Economics 2136, London School of Economics and Political Science, LSE Library.
    10. Danny Quah, 1995. "Empirics for Economic Growth and Convergence," CEP Discussion Papers dp0253, Centre for Economic Performance, LSE.
    11. Ben-David, D., 1995. "Measuring Income Convergence an Alternative Test," Papers 41-95, Tel Aviv.
    12. Barro, Robert J & Sala-i-Martin, Xavier, 1992. "Convergence," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 223-251, April.
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    Cited by:

    1. Holmes, Mark J. & Otero, Jesús & Panagiotidis, Theodore, 2011. "The term structure of interest rates, the expectations hypothesis and international financial integration: Evidence from Asian economies," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 679-689, October.
    2. Minoas Koukouritakis & Leo Michelis, 2005. "Term Structure Linkages Among the New EU Countries and the EMU," Working Papers 0515, University of Crete, Department of Economics.
    3. Minoas Koukouritakis & Leo Michelis, 2006. "The Term Structure of Interest Rates in the European Union," Working Papers 0611, University of Crete, Department of Economics.
    4. Georgoutsos, Dimitris A. & Kouretas, Georgios P., 2016. "Interest parity, cointegration, and the term structure: Testing in an integrated framework," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 281-294.
    5. Minoas Koukouritakis & Leo Michelis, 2008. "The term structure of interest rates in the 12 newest EU countries," Applied Economics, Taylor & Francis Journals, vol. 40(4), pages 479-490.
    6. Minoas Koukouritakis & Leo Michelis, 2005. "The Term Structures of Interest Rates in the New and Prospective EU Countries," Working Papers 0505, University of Crete, Department of Economics.

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