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Testing real interest parity in the European Monetary System

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  • Andrew G Haldane
  • Mahmood Pradhan

Abstract

Current discussions on Economic and Monetary Union (EMU) in Europe have stressed the need for enhanced integration of goods and factor markets as a pre condition of moving as costlessly as possible to a single currency system. The real interest differential - and hence tests of real interest parity - provide a summary measure of the degree of residual integration necessary such that these conditions are met. Empirical tests suggest a rejection of real interest parity among European Monetary System (EMS) member countries, at least during recent years. Further, a decomposition of the differential suggests that imperfect integration of goods markets, as reflected in a failure of ex-ante PPP, is largely responsible for this finding.

Suggested Citation

  • Andrew G Haldane & Mahmood Pradhan, 1992. "Testing real interest parity in the European Monetary System," Bank of England working papers 2, Bank of England.
    • Handle: RePEc:boe:boeewp:2
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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1992/wp02.pdf
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    References listed on IDEAS

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    Cited by:

    1. Jong Eun Lee, 2002. "Real interest rates in regional economic blocs," Applied Economics, Taylor & Francis Journals, vol. 34(7), pages 859-864.
    2. Mariam Camarero & Javier Ordon Ez & Cecilio Tamarit, 2002. "Tests for interest rate convergence and structural breaks in the EMS: further analysis," Applied Financial Economics, Taylor & Francis Journals, vol. 12(6), pages 447-456.
    3. Mariam Camarero & Cecilio Tamarit, 1996. "Cointegration and the PPP and the UIP hypotheses: An application to the Spanish integration in the EC," Open Economies Review, Springer, vol. 7(1), pages 61-76, January.
    4. Darren Pain & Ryland Thomas, 1997. "Real Interest Rate Linkages: Testing for Common Trends and Cycles," Bank of England working papers 65, Bank of England.
    5. Camarero, Mariam, & Flôres, R. & C. Tamarit, 2002. "Time series evidence of international output convergence in Mercosur," Computing in Economics and Finance 2002 87, Society for Computational Economics.
    6. Holmes, Mark J. & Maghrebi, Nabil, 2008. "Is there a connection between monetary unification and real economic integration? Evidence from regime-switching stationarity tests," Journal of International Money and Finance, Elsevier, vol. 27(6), pages 958-970, October.
    7. R J Colwell & E P Davis, 1992. "Output, Productivity and Externalities - the Case of Banking," Bank of England working papers 3, Bank of England.

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