Testing for Convergence: the Punt-Sterling Relationship in the Context of the EMS

This work seeks to analyze the stability of the exchange rate between the Irish and Sterling pounds. Towards this end, we work on a procedure, previously suggested by Haldane & Hall (1991), based on a regression with changing parameters and propose a statistical test of the null hypothesis of non-convergence versus the 'tendency towards convergence' alternative. The interest of the application rests in the fact that Ireland and the United Kingdom represent two countries that have traditionally maintained very strong commercial relationships, which forces them to maintain a very stable exchange rate in practice.