Testing for monetary policy convergence in European countries

Journal of Economic Studies 10/1998; 25(October):353-369. DOI: 10.1108/01443589810233658
Source: RePEc


The paper tests for long-run monetary policy convergence and short-run policy interactions in seven ERM countries over the 1979-1992 period using the approach of multivariate cointegration and Granger-causality tests. The authors provide evidence for very little monetary policy convergence, even during the more stable 1987-92 period. Tests for short-run monetary policy interactions show that, in agreement with some other studies, Germany is not the leader country in the system as it appears to accommodate shocks in other member countries. The tests show also that full monetary policy convergence applied among Germany, Belgium and The Netherlands in the 1987-92 period implies that these countries could be the first to join a European monetary union should a two-speed approach to monetary union become a reality.

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    • ", the 16 members of the Eurozone are: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal , Slovakia, Slovenia, and Spain. 7 Among these variables are, for example, money supplies, inflation rates, short-term and long-term interest rates, gross domestic products (GDP) and indices of industrial productions, and national budget deficits as a ratio of GDP (see Bernard and Durlauf, 1995, Bredin and Fountas, 1998, Caporale and Pittis, 1993, Fountas and Wu, 1998, Hafer and Kutan, 1997, Haug, MacKinnon, and Michelis, 2000, Holmes, 2000, 2002). "
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    ABSTRACT: We test for European stock market integration by comparing the expectations of stochastic discount factors (SDF) across markets. As opposed to other market integration methods, the SDF approach allows for lesser and milder assumptions. We allow stocks to have general risk characteristics, which we only constrain through (i) the CAPM, (ii) the Fama and French, and the (iii) Carhart model of covariances. Our findings suggest that equity markets are not integrated on a pan-European level. We find, however, that the stock markets of Germany, France, and the United Kingdom are interrelated. We also document that the better part of European equity markets is linked to Germany's stock market. Our results also provide empirical support for an interdependence of the stock markets of the BeNeLux states.
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    • "This conclusion is possible for at least two reasons. First, several other studies provide parallel evidence of long-run economic integration of EU countries as measured by convergence of their key economic variables through cointegrating relationships (e.g., Caporale and Pittis, 1993; Hafer and Kutan, 1994; Bredin and Fountas, 1998; Haug et al., 2000; Bernard and Durlauf, 1995; Holmes, 2002). The key economic variables used in those studies represent either monetary sectors (e.g., money supplies, interest rates and inflation rates) or real/production sectors (e.g., GDPs and indices of industrial production) of the EU countries. "

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