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Forward Interest Rates as Predictors of EMU

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  • De Grauwe, Paul

Abstract

The use of forward interest rates with a settlement time after the start of EMU (1 January 1999) allows us to derive probabilities attached by the market to the occurrence of EMU. We use the DM/ECU forward interest rates as our central source of information. We arrive at the conclusion that the market attaches a very low probability to the ECU being transformed into the Euro, with an irrevocably fixed exchange rate with the other EMU member countries, by 1999. We also compute the probabilities of entry into EMU for individual currencies.

Suggested Citation

  • De Grauwe, Paul, 1996. "Forward Interest Rates as Predictors of EMU," CEPR Discussion Papers 1395, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:1395
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    Citations

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    Cited by:

    1. Favero, Carlo A. & Giavazzi, Francesco & Iacone, Fabrizio & Guido Tabellini, 2000. "Extracting information from asset prices: The methodology of EMU calculators," European Economic Review, Elsevier, vol. 44(9), pages 1607-1632, October.
    2. Jiménez-Martín, Juan-Ángel & Cinca, Alfonso Novales, 2010. "State-uncertainty preferences and the risk premium in the exchange rate market," Economic Modelling, Elsevier, vol. 27(5), pages 1043-1053, September.
    3. Raphaelle Bellando & Servane Pfister & Jean-Paul Pollin, 2000. "Évolution et déterminants de la crédibilité de l’Union Monétaire Européenne durant la phase de transition : une étude comparative France, Italie et Grande-Bretagne," Revue d'Économie Financière, Programme National Persée, vol. 56(1), pages 165-194.
    4. Viktors Ajevskis & Kristine Vitola, 2010. "A Convergence Model of the Term Structure of Interest Rates," Review of Finance, European Finance Association, vol. 14(4), pages 727-747.
    5. Reher, Gerrit & Wilfling, Bernd, 2014. "The valuation of European call options on zero-coupon bonds in the run-up to a fixed exchange-rate regime," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 483-496.
    6. Wilfling, Bernd, 2009. "Volatility regime-switching in European exchange rates prior to monetary unification," Journal of International Money and Finance, Elsevier, vol. 28(2), pages 240-270, March.
    7. Juan Ángel Jiménez Martín & Rodrigo Peruga Urrea, 2003. "La Transición al Euro y la Prima de Riesgo en el Mercado de Divisas," Documentos de Trabajo del ICAE 0306, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    8. J. Weidmann, 1996. "The likelihood of European Monetary Union," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 49(199), pages 405-413.
    9. Robert N. McCauley & William R. White, 1997. "The Euro and European financial markets," BIS Working Papers 41, Bank for International Settlements.
    10. Bates, David S., 1999. "Financial markets' assessments of EMU," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 51(1), pages 229-269, December.
    11. J. Weidmann, 1996. "The likelihood of European Monetary Union," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 49(199), pages 405-413.
    12. Robert McCauley, 1999. "The Euro and the Dollar, 1998," Open Economies Review, Springer, vol. 10(1), pages 91-133, February.
    13. Livio Stracca, "undated". "Economics and Politics: Interest Rate Convergence in Europe and EMU," Discussion Papers in European Economics 99/6, Division of Economics, School of Business, University of Leicester.
    14. Martin Cincibuch & Matrina Horníková, 2008. "Measuring the Financial Markets’ Perception of EMU Enlargement: The Role of Ambiguity Aversion," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 58(05-06), pages 210-230, August.
    15. Syllignakis, Manolis N. & Kouretas, Georgios P., 2011. "Markov-switching regimes and the monetary model of exchange rate determination: Evidence from the Central and Eastern European markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(5), pages 707-723.
    16. Bernardino Adao & Jorge Barros Luis, 2000. "Interest rate spreads implicit in options: Spain and Italy against Germany," Applied Financial Economics, Taylor & Francis Journals, vol. 10(2), pages 155-161.
    17. David S. Bates, 1999. "Financial Markets' Assessment of EMU," NBER Working Papers 6874, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Monetary Integration;

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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