Testing for Real Interest Rate Convergence in European Countries.

The authors use cointegration tests that determine endogenously the regime shift to test for bilateral short-term and long-term real interest rate convergence in the European Monetary System in the 1979-93 period. The results of these tests provide strong evidence in favor of bilateral real interest rate convergence between Germany and several countries in the authors' sample, particularly for long-term real interest rates. This result carries the important policy implication that, in several European countries, monetary policy has lost some of its effectiveness as a stabilization policy tool. Copyright 1999 by Scottish Economic Society.