Convergence in Interest Rates and Inflation Rates Across Countries and Over Time

We examine the relationship between interest rates and inflation rates for ten countries during the period 1974- 1995. We find evidence of a unique cointegrating relationship between nominal interest rates of EMS countries, the U.S. and Canada, and the U.S., Germany, and Japan. No similar relationship is obtained between inflation rates with one exception, namely the U.S. and Canada. We interpret these results as convergence in inflation but not in interest rates. Hence, if interest rates represent an indicator of monetary policy, the countries considered have attempted to implement independent policies but not to an extent which produced divergent trends in inflation