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Financial Markets' Assessment of EMU

  • David S. Bates
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    This article reviews the assumptions and methodologies underlying EMU probability calculators,' which infer from financial data the probability of specific countries joining the European Monetary Union. Some historical evidence is presented in support of the expectations hypothesis for intra-European interest rate differentials underlying most calculators, while various potential biases are deemed negligible. The various EMU calculators differ primarily in their scenarios for intra-European interest rate differentials conditional upon EMU not occurring. This article also discusses what can be inferred from financial data regarding future policies of the European Central Bank.

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    File URL: http://www.nber.org/papers/w6874.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6874.

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    Date of creation: Jan 1999
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    Publication status: published as Carnegie-Rochester Conference Series on Public Policy, Vol. 51, no. 1(1999): 229-269.
    Handle: RePEc:nbr:nberwo:6874
    Note: IFM
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.org
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    7. Hull, John C & White, Alan D, 1987. " The Pricing of Options on Assets with Stochastic Volatilities," Journal of Finance, American Finance Association, vol. 42(2), pages 281-300, June.
    8. Bean, Charles R, 1992. "Economic and Monetary Union in Europe," CEPR Discussion Papers 722, C.E.P.R. Discussion Papers.
    9. De Grauwe, Paul, 1996. "Forward Interest Rates as Predictors of EMU," CEPR Discussion Papers 1395, C.E.P.R. Discussion Papers.
    10. Richard Clarida & Jordi Gali & Mark Gertler, 1997. "Monetary Policy Rules in Practice: Some International Evidence," NBER Working Papers 6254, National Bureau of Economic Research, Inc.
    11. JosÈ B. Campa & P.H. Kevin Chang & Robert L. Reider, 1997. "ERM bandwidths for EMU and after: evidence from foreign exchange options," Economic Policy, CEPR;CES;MSH, vol. 12(24), pages 53-89, 04.
    12. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-89, October.
    13. Hardouvelis, Gikas A., 1994. "The term structure spread and future changes in long and short rates in the G7 countries: Is there a puzzle?," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 255-283, April.
    14. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
    15. Scott, Louis O., 1987. "Option Pricing when the Variance Changes Randomly: Theory, Estimation, and an Application," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(04), pages 419-438, December.
    16. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "An Intertemporal General Equilibrium Model of Asset Prices," Econometrica, Econometric Society, vol. 53(2), pages 363-84, March.
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