IDEAS home Printed from https://ideas.repec.org/p/oxf/wpaper/419.html
   My bibliography  Save this paper

Leader of the Pack? German Monetary Dominance in Europe Prior to EMU

Author

Listed:
  • J. James ReadeUlrich Volz

Abstract

In this paper, the monetary policy independence of European nations in the years before European Monetary Union (EMU) is investigated using cointegration techniques. Daily data is used to assess pairwise relationships between individual EMU nations and 'lead' nation Germany, to assess the hypothesis that Germany was the dominant European nation prior to EMU. By and large our econometric investigations support this hypothesis, and lead us to conclude that the only European nation to lose monetary policy independence in the light of monetary union was Germany.

Suggested Citation

  • J. James ReadeUlrich Volz, 2009. "Leader of the Pack? German Monetary Dominance in Europe Prior to EMU," Economics Series Working Papers 419, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:419
    as

    Download full text from publisher

    File URL: https://ora.ox.ac.uk/objects/uuid:825417f3-0024-42c3-b96a-63118434f826
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Mr. Thomas Philippon & Mr. Jeromin Zettelmeyer & Mr. Eduardo Borensztein, 2001. "Monetary Independence in Emerging Markets: Does the Exchange Rate Regime Make a Difference?," IMF Working Papers 2001/001, International Monetary Fund.
    2. Stanley Fischer, 1987. "International Macroeconomic Policy Coordination," NBER Working Papers 2244, National Bureau of Economic Research, Inc.
    3. Binder, Michael & Hsiao, Cheng & Pesaran, M. Hashem, 2005. "Estimation And Inference In Short Panel Vector Autoregressions With Unit Roots And Cointegration," Econometric Theory, Cambridge University Press, vol. 21(4), pages 795-837, August.
    4. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2005. "The Trilemma in History: Tradeoffs Among Exchange Rates, Monetary Policies, and Capital Mobility," The Review of Economics and Statistics, MIT Press, vol. 87(3), pages 423-438, August.
    5. Hendry, David & Hubrich, Kirstin, 2006. "Forecasting Economic Aggregates by Disaggregates," CEPR Discussion Papers 5485, C.E.P.R. Discussion Papers.
    6. Chang Jin Kim & Jong‐Wha Lee, 2008. "Exchange Rate Regime And Monetary Policy Independence In East Asia," Pacific Economic Review, Wiley Blackwell, vol. 13(2), pages 155-170, May.
    7. Giese, Julia V., 2008. "Level, Slope, Curvature: Characterising the Yield Curve in a Cointegrated VAR Model," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 2, pages 1-20.
    8. Lourdes Montoya & Jakob Haan, 2008. "Regional business cycle synchronization in Europe?," International Economics and Economic Policy, Springer, vol. 5(1), pages 123-137, July.
    9. António Afonso & Davide Furceri, 2009. "Sectoral Business Cycle Synchronization in the European Union," Economics Bulletin, AccessEcon, vol. 29(4), pages 2996-3014.
    10. Katarina Juselius & Ronald MacDonald, 2000. "Interest Rate and Price Linkages between the USA and Japan: Evidence from the Post-Bretton Woods Period," Discussion Papers 00-13, University of Copenhagen. Department of Economics.
    11. Torres,Francisco & Giavazzi,Francesco (ed.), 1993. "Adjustment and Growth in the European Monetary Union," Cambridge Books, Cambridge University Press, number 9780521440196.
    12. Fratzscher, Marcel, 2002. "The Euro bloc, the Dollar bloc and the Yen bloc: how much monetary policy independence can exchange rate flexibility buy in an interdependent world?," Working Paper Series 154, European Central Bank.
    13. Francesco Giavazzi & Marco Pagano, 1991. "The Advantage of Tying One's Hands: EMS Discipline and Central Bank Credibility," NBER Chapters, 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.
    14. Bent Nielsen & Anders Rahbek, 2000. "Similarity Issues in Cointegration Analysis," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 62(1), pages 5-22, February.
    15. Crespo Cuaresma, Jesus & Wojcik, Cezary, 2006. "Measuring monetary independence: Evidence from a group of new EU member countries," Journal of Comparative Economics, Elsevier, vol. 34(1), pages 24-43, March.
    16. Frankel, Jeffrey & Schmukler, Sergio L. & Serven, Luis, 2004. "Global transmission of interest rates: monetary independence and currency regime," Journal of International Money and Finance, Elsevier, vol. 23(5), pages 701-733, September.
    17. Hali Edison & Ronald MacDonald, 2003. "Credibility and Interest Rate Discretion in the ERM," Open Economies Review, Springer, vol. 14(4), pages 351-368, October.
    18. 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.
    19. Michele Fratianni & Juergen Hagen, 1990. "German dominance in the EMS," Open Economies Review, Springer, vol. 1(1), pages 67-87, February.
    20. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2004. "Monetary Sovereignty, Exchange Rates, and Capital Controls: The Trilemma in the Interwar Period," IMF Staff Papers, Palgrave Macmillan, vol. 51(s1), pages 75-108, June.
    21. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    22. Koichi Hamada & Beate Reszat & Ulrich Volz (ed.), 2009. "Towards Monetary and Financial Integration in East Asia," Books, Edward Elgar Publishing, number 13458.
    23. Fratianni, Michele & von Hagen, Juergen, 1990. "The European Monetary System ten years after," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 32(1), pages 173-241, January.
    24. Kirchgassner, Gebhard & Wolters, Jurgen, 1995. "Interest Rate Linkages in Europe before and after the Introduction of the European Monetary System: Some Empirical Results," Empirical Economics, Springer, vol. 20(3), pages 435-454.
    25. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    26. Banerjee, Anindya & Dolado, Juan J. & Galbraith, John W. & Hendry, David, 1993. "Co-integration, Error Correction, and the Econometric Analysis of Non-Stationary Data," OUP Catalogue, Oxford University Press, number 9780198288107.
    27. De Grauwe, Paul, 1989. "The Cost of Disinflation and the European Monetary System," CEPR Discussion Papers 326, C.E.P.R. Discussion Papers.
    28. Ulrich Volz, 2009. "Three Cases for Monetary Integration in East Asia," Chapters, in: Koichi Hamada & Beate Reszat & Ulrich Volz (ed.), Towards Monetary and Financial Integration in East Asia, chapter 8, Edward Elgar Publishing.
    29. 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.
    30. Julia Campos & David F. Hendry & Hans‐Martin Krolzig, 2003. "Consistent Model Selection by an Automatic Gets Approach," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(s1), pages 803-819, December.
    31. Kirchgassner, Gebhard & Wolters, Jurgen, 1993. "Does the DM Dominate the Euro Market? An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 773-778, November.
    32. Cohen, Daniel & Wyplosz, Charles, 1989. "The European Monetary Union: An Agnostic Evaluation," CEPR Discussion Papers 306, C.E.P.R. Discussion Papers.
    33. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
    34. De Grauwe, Paul, 1989. "Is the European Monetary System a DM-Zone?," CEPR Discussion Papers 297, C.E.P.R. Discussion Papers.
    35. 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.
    36. Sofia Gouveia & Leonida Correia, 2008. "Business cycle synchronisation in the Euro area: the case of small countries," International Economics and Economic Policy, Springer, vol. 5(1), pages 103-121, July.
    37. Andrew Hughes Hallett & Christian Richter, 2008. "Have the Eurozone economies converged on a common European cycle?," International Economics and Economic Policy, Springer, vol. 5(1), pages 71-101, July.
    38. Anders Møller Christensen & Heino Bohn Nielsen, 2009. "Monetary Policy in the Greenspan Era: A Time Series Analysis of Rules vs. Discretion," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(1), pages 69-89, February.
    39. Jay C. Shambaugh, 2004. "The Effect of Fixed Exchange Rates on Monetary Policy," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 301-352.
    40. Michael P. Clements & David F. Hendry, 2001. "Forecasting Non-Stationary Economic Time Series," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262531895, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. James McNeil, 2024. "Modeling interest rate setting at the European Central Bank with bargaining models and counterfactuals," Empirical Economics, Springer, vol. 66(3), pages 1037-1053, March.
    2. Goh, Soo Khoon & McNown, Robert, 2015. "Examining the exchange rate regime–monetary policy autonomy nexus: Evidence from Malaysia," International Review of Economics & Finance, Elsevier, vol. 35(C), pages 292-303.
    3. Marcel Fratzscher & Arnaud Mehl, 2014. "China's Dominance Hypothesis and the Emergence of a Tri‐polar Global Currency System," Economic Journal, Royal Economic Society, vol. 124(581), pages 1343-1370, December.
    4. J. James Reade & Ulrich Volz, 2011. "When You Got Nothing, You Got Nothing to Lose – Regional Monetary Integration and Policy Independence," Chapters, in: Ulrich Volz (ed.), Regional Integration, Economic Development and Global Governance, chapter 12, Edward Elgar Publishing.
    5. Łukasz Goczek & Dagmara Mycielska, 2014. "Monetary policy and nominal convergence in CEE countries with inflation targeting," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw, vol. 38.
    6. Reade, J. James & Volz, Ulrich, 2010. "Chinese monetary policy and the dollar peg," Discussion Papers 2010/35, Free University Berlin, School of Business & Economics.
    7. J. James Reade & Ulrich Volz, 2009. "Too Much to Lose, or More to Gain? Should Sweden Join the Euro?," Economics Series Working Papers 442, University of Oxford, Department of Economics.
    8. Łukasz Goczek & Dagmara Mycielska, 2013. "Ready for euro? Empirical study of the actual monetary policy independence in Poland," Working Papers 2013-13, Faculty of Economic Sciences, University of Warsaw.
    9. Ewe Ghee Lim & Soo Khoon Goh, 2016. "Is Malaysia exempted from the impossible trinity? An empirical analysis for an emerging market," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 9(2), pages 131-147, July.
    10. Chortareas, Georgios & Mavrodimitrakis, Christos, 2016. "Can monetary policy fully stabilize pure demand shocks in a monetary union with a fiscal leader?," Economic Modelling, Elsevier, vol. 54(C), pages 463-468.
    11. Łukasz Goczek & Dagmara Mycielska, 2013. "Long-run interest rate convergence in Poland and the EMU," Working Papers 2013-21, Faculty of Economic Sciences, University of Warsaw.
    12. Goczek, Łukasz & Witkowski, Bartosz, 2023. "Spillover effects of the unconventional monetary policy of the European Central Bank," The Quarterly Review of Economics and Finance, Elsevier, vol. 89(C), pages 82-104.
    13. Łukasz Goczek & Dagmara Mycielska, 2019. "Actual monetary policy independence in a small open economy: the Polish perspective," Empirical Economics, Springer, vol. 56(2), pages 499-522, February.
    14. Ulrich Volz, 2016. "Regional Financial Integration in East Asia against the Backdrop of Recent European Experiences," International Economic Journal, Taylor & Francis Journals, vol. 30(2), pages 272-293, June.
    15. Goczek, Łukasz & Partyka, Karol J., 2019. "Too small to be independent? On the influence of ECB monetary policy on interest rates of the EEA countries," Economic Modelling, Elsevier, vol. 78(C), pages 180-191.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. J. James Reade & Ulrich Volz, 2011. "When You Got Nothing, You Got Nothing to Lose – Regional Monetary Integration and Policy Independence," Chapters, in: Ulrich Volz (ed.), Regional Integration, Economic Development and Global Governance, chapter 12, Edward Elgar Publishing.
    2. Kadow, Alexander & Cerrato, Mario & MacDonald, Ronald & Straetmans, Stefan, 2013. "Does the euro dominate Central and Eastern European money markets?," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 700-718.
    3. Fratzscher, Marcel, 2002. "The Euro bloc, the Dollar bloc and the Yen bloc: how much monetary policy independence can exchange rate flexibility buy in an interdependent world?," Working Paper Series 154, European Central Bank.
    4. J. James Reade & Ulrich Volz, 2009. "Too Much to Lose, or More to Gain? Should Sweden Join the Euro?," Economics Series Working Papers 442, University of Oxford, Department of Economics.
    5. 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.
    6. Fratzscher, Marcel, 2002. "The Euro bloc, the Dollar bloc and the Yen bloc: how much monetary policy independence can exchange rate flexibility buy in an interdependent world?," Working Paper Series 0154, European Central Bank.
    7. Laopodis, N. T., 1998. "Asymmetric volatility spillovers in deutsche mark exchange rates," Journal of Multinational Financial Management, Elsevier, vol. 8(4), pages 413-430, November.
    8. Bogdan Căpraru & Iulian Ihnatov, 2011. "The Effect Of Exchange Rate Arrangements On Transmission Of Interest Rates And Monetary Policy Independence: Evidence From A Group Of New Eu Member Countries "," Analele Stiintifice ale Universitatii "Alexandru Ioan Cuza" din Iasi - Stiinte Economice (1954-2015), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 58, pages 71-81, november.
    9. Uctum, Merih, 1999. "European integration and asymmetry in the EMS," Journal of International Money and Finance, Elsevier, vol. 18(5), pages 769-798, October.
    10. Reade, J. James & Volz, Ulrich, 2010. "Chinese monetary policy and the dollar peg," Discussion Papers 2010/35, Free University Berlin, School of Business & Economics.
    11. Patrick Artus, 1992. "Passage à l'union économique et monétaire en Europe : effets sur la croissance et les politiques budgétaires," Économie et Prévision, Programme National Persée, vol. 106(5), pages 123-137.
    12. Chee-Hong Law & Chee-Lip Tee & Wei-Theng Lau, 2019. "The Impacts of Financial Integration on the Linkages Between Monetary Independence and Foreign Exchange Reserves," International Economic Journal, Taylor & Francis Journals, vol. 33(2), pages 212-235, April.
    13. Bajo-Rubio, Oscar & Sosvilla-Rivero, Simon & Fernandez-Rodriguez, Fernando, 2001. "Asymmetry in the EMS: New evidence based on non-linear forecasts," European Economic Review, Elsevier, vol. 45(3), pages 451-473, March.
    14. Nikiforos Laopodis, 2001. "International Interest-Rate Transmission and the “German Dominance Hypothesis” Within EMS," Open Economies Review, Springer, vol. 12(4), pages 347-377, October.
    15. Philippe Gudin & Antoine Magnier & Nicolas Ponty, 1991. "Taux d'intérêt : une asymétrie moins forte," Économie et Statistique, Programme National Persée, vol. 246(1), pages 55-63.
    16. John C. Bluedorn & Christopher Bowdler, 2010. "The Empirics of International Monetary Transmission: Identification and the Impossible Trinity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(4), pages 679-713, June.
    17. Goh, Soo Khoon & McNown, Robert, 2015. "Examining the exchange rate regime–monetary policy autonomy nexus: Evidence from Malaysia," International Review of Economics & Finance, Elsevier, vol. 35(C), pages 292-303.
    18. N. T. Laopodis, 2003. "Stochastic behaviour of Deutsche mark exchange rates within EMS," Applied Financial Economics, Taylor & Francis Journals, vol. 13(9), pages 665-676.
    19. William Bryant & Roselyne Joyeux, 2010. "Interest linkages between the US, UK and German interest rates: should the UK join the European Monetary Union?," International Review of Applied Economics, Taylor & Francis Journals, vol. 24(6), pages 633-647.
    20. Kremer, Manfred, 1999. "Die Kapitalmarktzinsen in Deutschland und den USA: Wie eng ist der Zinsverbund? Eine Anwendung der multivariaten Kointegrationsanalyse," Discussion Paper Series 1: Economic Studies 1999,02, Deutsche Bundesbank.

    More about this item

    Keywords

    Monetary policy independence; European monetary integration; Cointegrated VAR method;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oxf:wpaper:419. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Anne Pouliquen (email available below). General contact details of provider: https://edirc.repec.org/data/sfeixuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.