Interest Rate Convergence in the EMS Prior to European Monetary Union

CREATES Research Paper 2009-23

28 Pages Posted: 3 Jun 2009

See all articles by Michael Frömmel

Michael Frömmel

Ghent University - Department of Financial Economics

Robinson Kruse

Aarhus University

Date Written: June 2, 2009

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.

Keywords: interest rates, convergence, changing persistence, EMS, EMU

JEL Classification: C22, F33, F36

Suggested Citation

Frömmel, Michael and Kruse, Robinson, Interest Rate Convergence in the EMS Prior to European Monetary Union (June 2, 2009). CREATES Research Paper 2009-23. Available at SSRN: https://ssrn.com/abstract=1413110 or http://dx.doi.org/10.2139/ssrn.1413110

Michael Frömmel (Contact Author)

Ghent University - Department of Financial Economics ( email )

Sint-Pietersplein 5
Ghent, 9000
Belgium

Robinson Kruse

Aarhus University ( email )

Nordre Ringgade 1
DK-8000 Aarhus C, 8000
Denmark

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