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Interest rate convergence in the EMS prior to European Monetary Union

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  • M. FRÖMMEL

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  • R. KRUSE

Abstract

In this paper we analyze the convergence of interest rates in the European Monetary System (EMS) in a framework of changing persistence. This allows us to estimate the exact date of full convergence from the data. A change in persistence means that a time series switches from stationarity to non-stationarity, or vice versa. It is often argued that due to the specific historical situation in the EMS the interest rate differential was non-stationary before the full convergence of interest rates was achieved and stationary afterwards. Our empirical results suggest that the convergence date has been very different for Belgium, France, the Netherlands and Italy and are in line with the conclusions one would draw from a narrative approach. We compare three different estimators for the convergence date and find that the results are quite robust. Our results therefore stress the importance of credibility for monetary policy.

Suggested Citation

  • M. Frömmel & R. Kruse, 2009. "Interest rate convergence in the EMS prior to European Monetary Union," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 09/610, Ghent University, Faculty of Economics and Business Administration.
  • Handle: RePEc:rug:rugwps:09/610
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    Cited by:

    1. Ingo G. Bordon & Kai Daniel Schmid & Michael Schmidt, 2014. "Hypnosis Before Wake-up Call? The Revival of Sovereign Credit Risk Perception in the EMU-Crisis," IMK Working Paper 138-2014, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    2. repec:kap:ecopln:v:50:y:2017:i:3:d:10.1007_s10644-017-9208-3 is not listed on IDEAS
    3. Minoas Koukouritakis, 2016. "Eurozone Debt Crisis and Bond Yields Convergence: Evidence from the New EU Countries," Working Papers 1606, University of Crete, Department of Economics.
    4. Antonakakis, Nikolaos & Christou, Christina & Cunado, Juncal & Gupta, Rangan, 2017. "Convergence patterns in sovereign bond yield spreads: Evidence from the Euro Area," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 49(C), pages 129-139.
    5. Schmid, Kai Daniel & Schmidt, Michael, 2012. "EMU, the changing role of public debt and the revival of sovereign credit risk perception," University of Tuebingen Working Papers in Economics and Finance 48, University of Tuebingen, Faculty of Economics and Social Sciences.
    6. Kai Daniel Schmid & Michael Schmidt, 2012. "EMU and the Renaissance of Sovereign Credit Risk Perception," IAW Discussion Papers 87, Institut für Angewandte Wirtschaftsforschung (IAW).
    7. Frömmel, Michael & Kruse, Robinson, 2015. "Interest rate convergence in the EMS prior to European Monetary Union," Journal of Policy Modeling, Elsevier, pages 990-1004.
    8. Sibbertsen, Philipp & Wegener, Christoph & Basse, Tobias, 2014. "Testing for a break in the persistence in yield spreads of EMU government bonds," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 109-118.

    More about this item

    Keywords

    Interest rates; convergence; changing persistence; EMS; EMU;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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