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Interest rate convergence in the EMS prior to European Monetary Union

  • Michael Frömmel

    (Ghent University)

  • Robinson Kruse

    ()

    (Aarhus University and CREATES)

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.

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Paper provided by Department of Economics and Business Economics, Aarhus University in its series CREATES Research Papers with number 2009-23.

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Length: 26
Date of creation: 02 Jun 2009
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Handle: RePEc:aah:create:2009-23
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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