Excess Returns on Irish Pound Assets in the EMS

This paper examines the relation between Irish and foreign short-term interest rates from the perspective of the expectations approach to understanding interest rate determination. In particular it addresses the question of whether Irish money market interest rates have been in some sense ? too high? during the EMS period. This answer depends on whether the comparison is made with German or UK interest rates. Appealing to recent developments in the theory of international interest rate linkages, we argue that German rates are the more relevant comparator. It follows that Irish money market interest rates appear to have been ?too high? on average.