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Macroeconomic instability in the European monetary system?

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  • A. Morales-Zumaquero
  • Simon Sosvilla-Rivero

Abstract

This article analyses the impact of the establishment of the European Monetary System (EMS) on a number of macroeconomic variables, such as exchange rates, money, interest rates and prices for member countries participating in the Exchange Rate Mechanism (ERM). Instability is examined in terms of multiple structural breaks in the variance of the series. Two procedures are followed for this purpose: the OLS-based tests to detect multiple structural breaks, as proposed by Bai and Perron (1998, 2003), and several procedures based on Information Criterion together with the so-called sequential procedure suggested by Bai and Perron (2003). Results indicate that there is some evidence of structural breaks in volatility across investigated variables, with the realignments in the ERM playing a significant role in reducing volatility in some countries and sub-periods. In this regard, the results tend to support the hypothesis that the EMS has contributed to reducing macroeconomic volatility in member countries.

Suggested Citation

  • A. Morales-Zumaquero & Simon Sosvilla-Rivero, 2008. "Macroeconomic instability in the European monetary system?," Applied Financial Economics, Taylor & Francis Journals, vol. 18(12), pages 965-983.
    • Handle: RePEc:taf:apfiec:v:18:y:2008:i:12:p:965-983
    DOI: 10.1080/09603100701367401
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    More about this item

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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