Monetary Integration in Europe: Implications for Real Interest Rates and Stock Markets.

The authors calibrate a simple general equilibrium model to assess the implications of financial market integration on real interest rates and equity prices in Germany, France, Italy, and the United Kingdom. They consider a flexible exchange rate regime, a hard EMS, and a common currency. The authors find that the effect of these regime changes on real interest rates (via the risk premium) should be small but the effect on equity prices is potentially large. Moreover, the choice of central bank operating procedures may also be important for real interest rates. Copyright 1996 by The editors of the Scandinavian Journal of Economics.