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Title: Is the European Monetary System a DM-Zone?

Author(s): Paul De Grauwe

Publication Date: March 1989

Keyword(s): European Monetary System, Exchange Rates, Interest Rates and Speculation

Programme Area(s): International Macroeconomics

Abstract: In this paper we analyze issues of symmetry and asymmetry in the workings of the EMS. We first measure how interest rates react to speculative disturbances. We find that despite the fact that speculative shocks have usually forced the offshore interest rates of the weak currencies to increase by the full amount of the expected realignments, these countries managed (almost) completely to insulate their domestic interest rates from speculative crises. They achieved this by capital controls and other instruments of market segmentation. Second, using Granger causality tests, we find that the interdependence of interest rates is more symmetric than is usually assumed, involving, for example, an important two-way interdependece between Germany and France.

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Bibliographic Reference

De Grauwe, P. 1989. 'Is the European Monetary System a DM-Zone?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=297