| Abstract: | Conclusion This note has examined interest rate and monetary base linkages within the EMS. Cointegration tests suggest the existence
of a long-run equilibrium relationship between German and other EMS interest rates and German and other EMS country monetary
bases in a number of cases. Bivariate VAR analysis suggested that Granger causality with respect to EMS interest rate linkages
stemmed either from German to European markets or was bi-directional and that the monetary base linkages were overwhelmingly
bi-directional. When allowance is made for the influence of US monetary policy developments, the pattern of Granger causality
within the EMS is predominantly bi-directional. These findings may be attributable to integrated financial markets and the
discipline of a formal exchange rate mechanism. Thus, our results fail to support the hypothesis that German monetary policy
plays a dominant and independent role within the EMS. Rather, they suggest that monetary policies in the EMS mainly respond
to each other and, to a very limited extent, to developments in US monetary policy. |
