Towards European monetary integration: the evolution of currency risk premium as a measure for monetary convergence prior to the implementation of currency unions
We assess monetary convergence preceding the implementation of the European Monetary Union (EMU) through Kalman filtering estimates of the risk premium of eleven forward exchange rates of European and non-European currencies. Since all participating currencies are in effect identical from inception of a currency union, the convergence process to such an identical status should be reflected in the participating currencies' risk premiums prior to monetary union implementation. Starting from this assumption, we show the paths followed by the participating currencies towards monetary union. We find that the co-movements of risk premiums among the preceding European Monetary System (EMS) currencies differ across time periods but display a tendency to convergence to the German mark’s risk premium up to EMU implementation. The paper also shows a clear pattern of asymmetry of the participating currencies in relation to the German mark. JEL Classification: F02, F31, F33, F36, G15, G18
|Date of creation:||Dec 2005|
|Date of revision:|
|Contact details of provider:|| Postal: 60640 Frankfurt am Main, Germany|
Phone: +49 69 1344 0
Fax: +49 69 1344 6000
Web page: http://www.ecb.europa.eu/
More information through EDIRC
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.:
- Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-53, October.
- Ansley, Craig F. & Spivey, W. Allen & Wrobleski, William J., 1977. "On the structure of moving average processes," Journal of Econometrics, Elsevier, vol. 6(1), pages 121-134, July.
- Zellner, Arnold, 1988.
"Causality and causal laws in economics,"
Journal of Econometrics,
Elsevier, vol. 39(1-2), pages 7-21.
- A. C. Harvey, 1986. "Analysis and Generalisation of a Multivariate Exponential Smoothing Model," Management Science, INFORMS, vol. 32(3), pages 374-380, March.
- 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.
- Jacobs, Rodney L & Leamer, Edward E & Ward, Michael P, 1979.
"Difficulties with Testing for Causation,"
Western Economic Association International, vol. 17(3), pages 401-13, July.
- Roll, Richard & Solnik, Bruno, 1977. "A pure foreign exchange asset pricing model," Journal of International Economics, Elsevier, vol. 7(2), pages 161-179, May.
- Heinz-Dieter Smeets, 1990. "Does Germany Dominate the EMS?," Journal of Common Market Studies, Wiley Blackwell, vol. 29(1), pages 37-52, 09.
- Bossaerts, Peter & Hillion, Pierre, 1991. "Market Microstructure Effects of Government Intervention in the Foreign Exchange Market," Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 513-41.
- Lewis, Karen K., 1995. "Puzzles in international financial markets," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 37, pages 1913-1971 Elsevier.
- Bekaert, Geert & Hodrick, Robert J., 1993.
"On biases in the measurement of foreign exchange risk premiums,"
Journal of International Money and Finance,
Elsevier, vol. 12(2), pages 115-138, April.
- Geert Bekaert & Robert J. Hodrick, 1991. "On Biases in the Measurement of Foreign Exchange Risk Premiums," NBER Working Papers 3861, National Bureau of Economic Research, Inc.
- Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
- Charles Evans & Kenneth Kuttner, 1998.
"Can VARs describe monetary policy?,"
9812, Federal Reserve Bank of New York.
- Artus, P. & Avouyi-Dovi, S. & Bleuze, E. & Lecointe, F., 1991. "Transmission of U.S. monetary policy to Europe and asymmetry in the European monetary system," European Economic Review, Elsevier, vol. 35(7), pages 1369-1384, October.
- Frankel, Jeffrey A., 1982. "In search of the exchange risk premium: A six-currency test assuming mean-variance optimization," Journal of International Money and Finance, Elsevier, vol. 1(1), pages 255-274, 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.
- Robert J. Hodrick & Sanjay Srivastava, 1985.
"The Covariation of Risk Premiums and Expected Future Spot Exchange Rates,"
NBER Working Papers
1749, National Bureau of Economic Research, Inc.
- Hodrick, Robert J. & Srivastava, Sanjay, 1986. "The covariation of risk premiums and expected future spot exchange rates," Journal of International Money and Finance, Elsevier, vol. 5(1, Supple), pages S5-S21, March.
- Francesco Giavazzi & Marco Pagano, 1991.
"The Advantage of Tying One's Hands: EMS Discipline and Central Bank Credibility,"
in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 303-330
National Bureau of Economic Research, Inc.
- Giavazzi, Francesco & Pagano, Marco, 1988. "The advantage of tying one's hands : EMS discipline and Central Bank credibility," European Economic Review, Elsevier, vol. 32(5), pages 1055-1075, June.
- Giavazzi, Francesco & Pagano, Marco, 1986. "The Advantages of Tying One's Hands: EMS Discipline and Central Bank Credibility," CEPR Discussion Papers 135, C.E.P.R. Discussion Papers.
- Granger, C. W. J., 1988. "Some recent development in a concept of causality," Journal of Econometrics, Elsevier, vol. 39(1-2), pages 199-211.
- Hagen, Jurgen von & Fratianni, Michele, 1990. "German dominance in the EMS: evidence from interest rates," Journal of International Money and Finance, Elsevier, vol. 9(4), pages 358-375, December.
- Hsieh, David A., 1984. "Tests of rational expectations and no risk premium in forward exchange markets," Journal of International Economics, Elsevier, vol. 17(1-2), pages 173-184, August.
When requesting a correction, please mention this item's handle: RePEc:ecb:ecbwps:20050569. 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: (Official Publications)
If references are entirely missing, you can add them using this form.