International Interest-Rate Transmission and the “German Dominance Hypothesis†Within EMS

This article investigates whether the German Dominance Hypothesis is valid within the context of nominal short-term interest rates. The approach taken to address this hypothesis is based on the notion that German interest rates should convey valuable information to other countries' rates or that there exist significant multidirectional volatility spillovers from the Bundesbank to other nations' central banks. These transfers can be analyzed within a multivariate framework of an Exponential GARCH model capable of capturing the potential asymmetries of the volatility spillover mechanism. The results, basically, do not support the idea of a German predominance within the system, in a strict sense, since Germany's rates are also affected, for the most part, by actions from its partners. Copyright Kluwer Academic Publishers 2001