Testing for monetary policy convergence in european countries

Abstract

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. We provide evidence for very little monetary policy convergence, even during the more stable 1987-1992 period. Our 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. Our tests show also that full monetary policy convergence applied among Germany, Belgium and Netherlands in the 1987-1992 period implying that these countries could be the first to join a European monetary union should a two-speed approach to monetary union become a reality.