Interest rate linkages within the European Monetary System: an alternative interpretation

Guglielmo Maria Caporale and Nikitas Pittis ()

Applied Economics Letters, 1995, vol. 2, issue 2, 45-47

Abstract: In this note the empirical evidence presented by Karfakis and Moschos (1990) and Katsimbris and Miller (1993) on interest rate linkages in the EMS is reinterpreted and their finding of non-stationarity of interest rate differentials in the EMS is rationalized. It is argued that their results are not counterintuitive if it is taken into account that the integration of financial markets in the EMS has been a gradual process, which has implied slow convergence of interest rates to German levels. Such a dynamic process accounts for the non-stationarity of interest rate differentials. However, the argument that standard parity conditions require pairwise cointegration of interest rates is a valid one once convergence has been achieved.

Date: 1995
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DOI: 10.1080/135048595357681

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