Real Interest Parity, Dynamic Convergence and the European Monetary System

Bank of England Working Paper No. 1

Posted: 16 Jul 1998

Date Written: June 1992

Abstract

Is further economic convergence between European Monetary System (EMS) member countries desirable? This paper addresses some of the convergence issues currently being raised in the debate over Economic and Monetary Union (EMU) in Europe, with particular emphasis on the behavior of real interest rates. The important distinction between static and dynamic convergence is highlighted. A standard analytical framework is presented which illustrates the importance of the components of the real interest differential--namely capital controls, risk premia and the real exchange rate--as endogenous mechanisms for the transmission of policy. As such, variations in the real interest differential are shown potentially to be important for ensuring dynamic convergence to a steady-state EMU.

Suggested Citation

Haldane, Andrew and Pradhan, Mahmood, Real Interest Parity, Dynamic Convergence and the European Monetary System (June 1992). Bank of England Working Paper No. 1, Available at SSRN: https://ssrn.com/abstract=108168

Andrew Haldane (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Mahmood Pradhan

Bank of England

Threadneedle Street
London, EC2R 8AH
United Kingdom

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