Interest rate convergence in the EMS prior to European Monetary Union
In this paper we analyze the convergence of interest rates in the European Monetary System (EMS) in a framework of changing persistence. This allows us to estimate the exact date of full convergence from the data. A change in persistence means that a time series switches from stationarity to non-stationarity, or vice versa. It is often argued that due to the specific historical situation in the EMS the interest rate differential was non-stationary before the full convergence of interest rates was achieved and stationary afterwards. Our empirical results suggest that the convergence date has been very different for Belgium, France, the Netherlands and Italy and are in line with the conclusions one would draw from a narrative approach. We compare three different estimators for the convergence date and find that the results are quite robust. Our results therefore stress the importance of credibility for monetary policy.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Wolff, Christian C P, 1987.
" Forward Foreign Exchange Rates, Expected Spot Rates, and Premia: A Signal-Extraction Approach,"
Journal of Finance,
American Finance Association, vol. 42(2), pages 395-406, June.
- Wolff, Christian C, 1987. "Forward Foreign Exchange Rates, Expected Spot Rates, and Premia: A Signal-Extraction Approach," CEPR Discussion Papers 189, C.E.P.R. Discussion Papers.
- Karfakis, C. J. & Moschos, D.M., 1990.
"Interest Rate Linkages Within the European Monetary System: A Time Series Analysis,"
144, University of Sydney, School of Economics.
- Karfakis, Costas J & Moschos, Demetrios M, 1990. "Interest Rate Linkages within the European Monetary System: A Time Series Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(3), pages 389-94, August.
- Kim, Jae-Young, 2000. "Detection of change in persistence of a linear time series," Journal of Econometrics, Elsevier, vol. 95(1), pages 97-116, March.
- Stilianos Fountas & Jyh-Lin Wu, 1998. "Tests for interest rate convergence and structural breaks in the EMS," Applied Financial Economics, Taylor & Francis Journals, vol. 8(2), pages 127-132.
- Philipp Sibbertsen & Robinson Kruse, 2009.
"Testing for a break in persistence under long-range dependencies,"
Journal of Time Series Analysis,
Wiley Blackwell, vol. 30(3), pages 263-285, 05.
- Sibbertsen, Philipp & Kruse, Robinson, 2007. "Testing for a break in persistence under long-range dependencies," Hannover Economic Papers (HEP) dp-381, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
- Klaster, Michel A. & Knot, Klaas H. W., 2002. "Toward an econometric target zone model with endogenous devaluation risk for a small open economy," Economic Modelling, Elsevier, vol. 19(4), pages 509-529, August.
- Caporale, Guglielmo Maria & Kalyvitis, Sarantis & Pittis, Nikitas, 1996. "Interest rate convergence, capital controls, risk premia and foreign exchange market efficiency in the EMS," Journal of Macroeconomics, Elsevier, vol. 18(4), pages 693-714.
- Graham Elliott & Thomas J. Rothenberg & James H. Stock, 1992.
"Efficient Tests for an Autoregressive Unit Root,"
NBER Technical Working Papers
0130, National Bureau of Economic Research, Inc.
- Guglielmo Maria Caporale & Nikitas Pittis, 1995. "Interest rate linkages within the European Monetary System: an alternative interpretation," Applied Economics Letters, Taylor & Francis Journals, vol. 2(2), pages 45-47.
- Kim, Jae-Young & Belaire-Franch, Jorge & Amador, Rosa Badillo, 2002. "Corrigendum to "Detection of change in persistence of a linear time series" [J. Econom. 95 (2000) 97-116]," Journal of Econometrics, Elsevier, vol. 109(2), pages 389-392, August.
- Banerjee, Anindya & Lumsdaine, Robin L & Stock, James H, 1992.
"Recursive and Sequential Tests of the Unit-Root and Trend-Break Hypotheses: Theory and International Evidence,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 10(3), pages 271-87, July.
- Anindya Banerjee & Robin L. Lumsdaine & James H. Stock, 1990. "Recursive and Sequential Tests of the Unit Root and Trend Break Hypothesis: Theory and International Evidence," NBER Working Papers 3510, National Bureau of Economic Research, Inc.
- Hassapis, Christis & Pittis, Nikitas & Prodromidis, Kyprianos, 1999. "Unit roots and Granger causality in the EMS interest rates: the German Dominance Hypothesis revisited," Journal of International Money and Finance, Elsevier, vol. 18(1), pages 47-73, January.
- Katsimbris, George M & Miller, Stephen M, 1993. "Interest Rate Linkages within the European Monetary System: Further Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(4), pages 771-79, November.
- Busetti, Fabio & Taylor, A. M. Robert, 2004. "Tests of stationarity against a change in persistence," Journal of Econometrics, Elsevier, vol. 123(1), pages 33-66, November.
- Michael J. Artis & Mark P. Taylor, 1994. "The Stabilizing Effect of the ERM on Exchange Rates and Interest Rates: Some Nonparametric Tests," IMF Staff Papers, Palgrave Macmillan, vol. 41(1), pages 123-148, March.
- Baum, Christopher F. & Barkoulas, John, 2006.
"Dynamics of Intra-EMS Interest Rate Linkages,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 38(2), pages 469-482, March.
- Christopher F Baum & John Barkoulas, 2002. "Dynamics of Intra-EMS Interest Rate Linkages," Computing in Economics and Finance 2002 13, Society for Computational Economics.
- Christopher F. Baum & John Barkoulas, 2001. "Dynamics of Intra-EMS Interest Rate Linkages," Boston College Working Papers in Economics 492, Boston College Department of Economics, revised 04 May 2004.
- Stephen Leybourne & Tae-Hwan Kim & Vanessa Smith & Paul Newbold, 2003. "Tests for a change in persistence against the null of difference-stationarity," Econometrics Journal, Royal Economic Society, vol. 6(2), pages 291-311, December.
- Stephen Leybourne & Robert Taylor & Tae-Hwan Kim, 2007. "CUSUM of Squares-Based Tests for a Change in Persistence," Journal of Time Series Analysis, Wiley Blackwell, vol. 28(3), pages 408-433, 05.
- JÃ¼rgen von Hagen & Andrew Hughes Hallett & Rolf Strauch, 2001. "Budgetary Consolidation in EMU," European Economy - Economic Papers 148, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
- Carolina Castaldi & Giovanni Dosi, 2003. "The Grip of History and the Scope for Novelty: Some Results and Open Questions on Path Dependence in Economic Processes," LEM Papers Series 2003/02, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
- Kirchgassner, Gebhard & Wolters, Jurgen, 1995. "Interest Rate Linkages in Europe before and after the Introduction of the European Monetary System: Some Empirical Results," Empirical Economics, Springer, vol. 20(3), pages 435-54.
- Michael Frömmel & Lukas Menkhoff, 2001. "Risk Reduction in the EMS? Evidence from Trends in Exchange Rate Properties," Journal of Common Market Studies, Wiley Blackwell, vol. 39(2), pages 285-306, 06.
- Knot, Klaas & de Haan, Jakob, 1995. "Interest rate differentials and exchange rate policies in Austria, The Netherlands, and Belgium," Journal of Banking & Finance, Elsevier, vol. 19(2), pages 363-386, May.
- Shively, Philip A., 2000. "Stationary time-varying risk premia in forward foreign exchange rates," Journal of International Money and Finance, Elsevier, vol. 19(2), pages 273-288, April.
- Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
When requesting a correction, please mention this item's handle: RePEc:aah:create:2009-23. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.