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Exchange rate policy and economic convergence in the European Union

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posted on 2006-01-30, 18:12 authored by Mark J. Holmes
This paper tests for long-run macroeconomic convergence among European Union countries according to the various exchange rate regimes that have prevailed over the last forty years. Applying a recently developed test to monthly index of industrial production data, output convergence is confirmed or rejected depending on whether or not the first largest principal component based on benchmark deviations with respect to Germany is stationary or not. It is argued that this methodology has key advantages over existing cointegrating and common trends procedures. For most European Union countries, there is evidence of increased macroeconomic convergence during the 1990s where evidence is particularly strong for Belgium, France and the Netherlands. The evidence also indicates that the Snake era of the 1970s was more conducive towards convergence than the initial ERM period of 1979-92. Evidence of convergence is lacking for Austria, Finland and Sweden who joined the EU in 1995 and for a sample of non-EU countries.

History

School

  • Business and Economics

Department

  • Economics

Pages

72653 bytes

Publisher

© Loughborough University

Publication date

2000

Notes

This paper forms part of the ESRC funded project (Award No. L1382511013) "Business Cycle Volatility and Economic Growth: A Comparative Time Series Study", which itself is part of the Understanding the Evolving Macroeconomy Research programme.

Language

  • en

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