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On the European Monetary System: The Spillover Effects of German Shocks and Disinflation

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  • Julius Horvath

    (Southern Illinois Univ.)

  • Magda Kandil

    (Univ. of Wisconsin-Milwaukee)

  • Subhash C. Sharma

    (Southern Illinois Univ.)

Abstract

We analyze the disinflationary experience between 1979-1993 for two traditionally inflationary countries of the European Monetary System: France and Italy. For each country, a vector autoregressive model is estimated. Shocks in the model combine domestic and foreign sources. The latter capture the world oil price shocks as well as nominal and real shocks originating in Germany. Under investigation is the hypothesis that shocks originating in Germany have a spillover disinflationary effect in France and Italy. The empirical evidence provides support to the validity of this hypothesis. Furthermore, German shocks account for an important share of the total price variance in France and Italy. These results indicate that the interaction between countries of the European Monetary System has contributed to the success of the disinflationary experiences of the eighties. The evidence sheds, therefore, some light on potential benefits that may be further realized as countries of the European Monetary System move towards their objective of achieving a single currency under a unified monetary system.

Suggested Citation

  • Julius Horvath & Magda Kandil & Subhash C. Sharma, 1996. "On the European Monetary System: The Spillover Effects of German Shocks and Disinflation," Macroeconomics 9605001, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpma:9605001
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