Abstract:
We use cointegration tests that determine endogenously the regime shift to
test for bilateral short-term and long-term real interest rate convergence in
the European Monetary System in the 1979-1993 period. The results of
these tests provide strong evidence in favour of bilateral real interest rate
convergence between Germany and several countries in our sample, particularly
for long-term real interest rates. This result carries the important
policy implication that in several European countries monetary policy has
lost some of its effectiveness as a stabilisation policy tool.
