Wages and Prices in Europe: A Test of the German Leadership Thesis
The paper presents various tests of the hypothesis that, through the mechanism of the European Monetary System. Germany exercised a counter-inflationary leadership role in the 1980s. Evidence is provided that expectations of German inflation may be thought of as having impacted more strongly on expectations of inflation in other EMS countries in the EMS period than on non-EMS countries (the UK) and in earlier periods. Co-integration tests show inflation rates in partner EMS member countries to be cointegrated with inflation in Germany in the EMS period, but the same is true for the UK suggesting that the EMS arrangements could not have been responsible. Co-integration tests also reveal that bilateral exchange rates have not been particularly stable in this period and do not follow P.
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- Sargan, John Denis & Bhargava, Alok, 1983. "Testing Residuals from Least Squares Regression for Being Generated by the Gaussian Random Walk," Econometrica, Econometric Society, vol. 51(1), pages 153-74, January.
- Artis, Michael J & Taylor, Mark P, 1988. "Exchange Rates and the EMS: Assessing the Track Record," CEPR Discussion Papers 250, C.E.P.R. Discussion Papers.
- Ormerod, Paul, 1982. "Rational and Non-Rational Expectations of Inflation in Wage Equations for the United Kingdom," Economica, London School of Economics and Political Science, vol. 49(196), pages 375-87, November.
- Baillie, Richard T. & Selover, David D., 1987. "Cointegration and models of exchange rate determination," International Journal of Forecasting, Elsevier, vol. 3(1), pages 43-51.
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