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Testing real interest parity in the European Monetary System

  • Andrew G Haldane
  • Mahmood Pradhan

Current discussions on Economic and Monetary Union (EMU) in Europe have stressed the need for enhanced integration of goods and factor markets as a pre condition of moving as costlessly as possible to a single currency system. The real interest differential - and hence tests of real interest parity - provide a summary measure of the degree of residual integration necessary such that these conditions are met. Empirical tests suggest a rejection of real interest parity among European Monetary System (EMS) member countries, at least during recent years. Further, a decomposition of the differential suggests that imperfect integration of goods markets, as reflected in a failure of ex-ante PPP, is largely responsible for this finding.

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Paper provided by Bank of England in its series Bank of England working papers with number 2.

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Date of creation: Jul 1992
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Handle: RePEc:boe:boeewp:2
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  1. Peek, Joe & Wilcox, James A, 1983. " The Postwar Stability of the Fisher Effect," Journal of Finance, American Finance Association, vol. 38(4), pages 1111-24, September.
  2. Batchelor, R. A., 1986. "The psychophysics of inflation," Journal of Economic Psychology, Elsevier, vol. 7(3), pages 269-290, September.
  3. 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.
  4. Cumby, Robert E. & Mishkin, Frederic S., 1986. "The international linkage of real interest rates: The European-US connection," Journal of International Money and Finance, Elsevier, vol. 5(1), pages 5-23, March.
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