Asymmetry in the EMS revisited: Evidence from the causality analysis of daily Eurorates

This study uses non-stationary econometrics to analyze asymmetry and dominance within the EMS through interest rate linkages between the French franc, the German deutsche mark and the US dollar. High frequency data (daily Eurorates from April 1983 to the end of 1992) are used for their better suitability to the analysis of the causal linkages. We first show there is a break in the long-run structure of the system of interest rates: two sub-periods are therefore analyzed, before and after German unification. Three types of causality are then studied: causality in short-run dynamics and through long-run exogeneity in the VAR representation as well as neutrality in the MA representation. On both periods, causality tests confirm the French rate is submitted to the German dominance in the short-run. Posterior to the unification, the German interest rate is strongly exogenous, even with respect to the dollar. The neutrality analysis also shows the forces driving the system are the dollar and the DM rates prior to unification, but only the latter afterwards.