Asymmetry in the EMS revisited: Evidence from the Causality Analysis of Daily Eurorates

We use non-stationary econometrics to analyze asymmetry and dominance within the EMS through interest rate linkages from April 1983 to the end of 1992. Daily data (French, German and US one-month Eurorates) are used for their better suitability to the analysis of causality. 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 concepts of causality are then tested: causality in short-run dynamics and long-run exogeneity in the VAR representation as well as long-run impulse-response in the MA representation. On both sub-periods, tests confirm the French rate is submitted to the German dominance in the short-run. Posterior to the unification, the German interest rate dynamics does not even depend on that of the US rate. The MA analysis also shows the trends driving the system come from the US and the German rates prior to unification, but only from the latter afterwards.