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Real interest parity, dynamic convergence and the European Monetary System

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  • Andrew G Haldane
  • Mahmood Pradhan

Abstract

Is further economic convergence between European Monetary System (EMS) member countries desirable? This paper addresses some of the convergence issues currently being raised in the debate over Economic and Monetary Union (EMU) in Europe, with particular emphasis on the behaviour of real interest rates. The important distinction between static and dynamic convergence is highlighted. A standard analytical framework is presented which illustrates the importance of the components of the real interest differential - namely capital controls, risk premia and the real exchange rate - as endogenous mechanisms for the transmission of policy. As such, variations in the real interest differential are shown potentially to be important for ensuring dynamic convergence to a steady-state EMU.

Suggested Citation

  • Andrew G Haldane & Mahmood Pradhan, 1992. "Real interest parity, dynamic convergence and the European Monetary System," Bank of England working papers 1, Bank of England.
  • Handle: RePEc:boe:boeewp:1
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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1992/wp01.pdf
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    Cited by:

    1. Jong Eun Lee, 2002. "Real interest rates in regional economic blocs," Applied Economics, Taylor & Francis Journals, vol. 34(7), pages 859-864.
    2. Andrew G Haldane & Mahmood Pradhan, 1992. "Testing real interest parity in the European Monetary System," Bank of England working papers 2, Bank of England.
    3. Mariam Camarero & Javier Ordon Ez & Cecilio Tamarit, 2002. "Tests for interest rate convergence and structural breaks in the EMS: further analysis," Applied Financial Economics, Taylor & Francis Journals, vol. 12(6), pages 447-456.
    4. Mariam Camarero & Cecilio Tamarit, 1996. "Cointegration and the PPP and the UIP hypotheses: An application to the Spanish integration in the EC," Open Economies Review, Springer, vol. 7(1), pages 61-76, January.
    5. Camarero, Mariam, & FlĂ´res, R. & C. Tamarit, 2002. "Time series evidence of international output convergence in Mercosur," Computing in Economics and Finance 2002 87, Society for Computational Economics.

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