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A Dynamic Approach to Interest Rate Convergence in Selected Euro-candidate Countries

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  • Gabrisch, Hubert
  • Orlowski, Lucjan T.

Abstract

We advocate a dynamic approach to monetary convergence to a common currency that is based on the analysis of financial system stability. Accordingly, we empirically test volatility dynamics of the tenyear sovereign bond yields of the 2004 EU accession countries in relation to the eurozone yields during the January 2, 2001 untill January 22, 2009 sample period. Our results show a varied degree of bond yield comovements, the most pronounced for the Czech Republic, Slovenia and Poland, and weaker for Hungary and Slovakia. However, since the EU accession, we find some divergence of relative bond yields. We argue that a static specification of the Maastricht criterion for longterm bond yields is not fully conducive for advancing stability of financial systems in the eurocandidate countries.

Suggested Citation

  • Gabrisch, Hubert & Orlowski, Lucjan T., 2009. "A Dynamic Approach to Interest Rate Convergence in Selected Euro-candidate Countries," IWH Discussion Papers 10/2009, Halle Institute for Economic Research (IWH).
  • Handle: RePEc:zbw:iwhdps:iwh-10-09
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    References listed on IDEAS

    as
    1. Josef C. Brada & Ali M. Kutan & Su Zhou, 2002. "Real and Monetary Convergence within the European Union and Between the European Union and Candidate Countries: A Rolling Cointegration Approach," William Davidson Institute Working Papers Series 458, William Davidson Institute at the University of Michigan.
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    More about this item

    Keywords

    interest rate convergence; common currency area; new EU Member States; interest rate risk; GARCH; Zinskonvergenz; Währungsunion; neue EU-Länder; Zinsrisiken; GARCH;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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