A New Test of International Financial Integration with Application to the European Union
In this paper we test for financial integration among the major European Union countries using a new test, due to Snell(1996), which allows us to confirm or reject covered interest rate parity. Indeed, we offer a new distinction between strong or weak financial integrtion depending on whether or not the frist largest principal component based on deviations from covered interest parity is stationary. Despite the turbulence in the ERM during the early 1990s, we find evidence of increased financial inter-dependence of on shore domestic interest rates implying that European monetary polices are in general converging.
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