Dynamics of intra-EMS interest rate linkages

Christopher F. Baum, John Barkoulas

Research output: Contribution to journalSystematic reviewpeer-review

21 Scopus citations

Abstract

A number of previous studies have questioned the dominant role of Germany within the European Monetary System (EMS). These conclusions are often based on empirical findings that the interest rates of EMS member countries are not affected by German interest rates, even in the long run. In this study, we demonstrate that intra-EMS interest rate differentials (vis-à-vis Germany) exhibit mean-reverting behavior characterized by long-memory dynamics. In a system incorporating six EMS countries and one non-EMS country (the U.S.A.), estimates from a fractional error correction model suggest the presence of short-run intra-EMS monetary-policy interdependencies but validate the German Dominance Hypothesis in the long run.

Original languageEnglish
Pages (from-to)469-482
Number of pages14
JournalJournal of Money, Credit and Banking
Volume38
Issue number2
DOIs
StatePublished - Mar 2006

Scopus Subject Areas

  • Accounting
  • Finance
  • Economics and Econometrics

Keywords

  • EMS
  • Fractional error-correction
  • German dominance
  • Interest rates
  • Mean reversion
  • Monetary policy

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