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The paper analyses the sources of persistent interest rate differentials vis-a-vis Germany that have existed in Belgium, Denmark, France, Ireland, Italy, and the Netherlands. In a target zone system like the ERM, interest rate differentials mainly reflect devaluation expectations, which are measured here by raw 1-month Euromarket interest rate differentials, drift-adjusted 1-month differentials, and differentials in long-term government bond yields. The role of a large set of fundamental macroeconomic variables that may have affected these devaluation expectations is investigated within a vector autoregressive (VAR) setting, by means of Granger-causality tests, impulse-response functions and variance decompositions. We find no evidence that fundamentals are more relevant to drift-adjusted devaluation risk than for unadjusted interest rate differentials. A significant impact of inflation, budget deficits, and unemployment becomes evident for almost all ERM-participants. [ABSTRACT FROM AUTHOR]

This paper investigates the long run relationship of real interest rates within a number of economic blocs such as Asia–Pacific, Europe, North America using cointegration analysis and vector error correction models. [ABSTRACT FROM AUTHOR]

Using data from a panel of 15 countries over the period 1990-1998, the determinants of the use of noncash payment instruments are analysed. The estimation results highlight the importance of distinguishing between the determinants of the value and volume of noncash transactions. It is found in fact that the volume of these transactions is generally affected by changes in the determinants more strongly than their value, and that variables such as the interest rate have a different impact on the volume and the value of the transactions. The findings also suggest that past habits play a dominant role in the intensity of use of noncash payment instruments. [ABSTRACT FROM AUTHOR]

This article analyses the impact of loan market competition on the interest rates applied by euro area banks to loans during the period 1994–2004, using a novel measure of competition called the Boone indicator. We find evidence that stronger competition implies significantly lower spreads between bank and market interest rates for most loan market products, in line with expectations. This result implies that stronger competition causes both lower bank interest rates and a stronger pass-through of market rate changes into bank rates. Evidence of the latter is also presented by our Error Correction Model (ECM) for bank rates. Further, banks compensate income losses from increased loan market competition by offering lower deposit rates. Our findings with respect to the loan market rates have important monetary policy implications, as they suggest that measures to promote competition in the European banking sector are likely to render the monetary policy transmission mechanism more effective. [ABSTRACT FROM PUBLISHER]

A panel data set for six countries (Czech Republic, Hungary, Poland, Romania, Slovakia and Slovenia) is used to estimate money demand with panel cointegration methods over the recent disinflation period. The basic money demand model is able to convincingly explain the long-run dynamics of M2 in the selected countries. However, money demand is found to have been significantly determined by the euro area interest rates and the exchange rate against the euro, which indicates possible instability of money demand functions in the Central and Eastern European countries. Therefore, direct inflation targeting is an appropriate monetary regime before the eventual adoption of the euro. [ABSTRACT FROM AUTHOR]

A cointegrating approach is undertaken in this study to determine if there is a long-run equilibrium relationship between budget deficits and long-term interest rates for the United States and nine European countries. The cointegration approach consists of conducting cointegration tests and then testing several hypothesized values for the deficit and price expectations variables. The cointegration results suggest the existence of several significant cointegrating vectors for each of the ten countries, which would seem to appeal to the view of budget deficits having a positive impact on long-term interest rates. The hypothesized values for the deficit and price expectations variables are found to be too strict since the hypotheses are rejected in every case but one. [ABSTRACT FROM AUTHOR]

This article examines the regime changes in the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS), applying the duration model approach to weekly data of eight currencies participating in the ERM, covering the complete EMS history. When using the non-parametric (univariate) analysis, it was found that for those regimens with long durations, the ERM would have been relatively stable, while for the (more common) regimes associated with short durations would have been more unstable. The probability of maintaining a certain regime is estimated to be 0.685. When applying a parametric (multivariate) analysis to investigate the role of other variables in the probability of a regime change, it is concluded that the interest rate differential with Germany and the magnitude of the realignment would have negatively affected the duration of a given regime, while credibility would have positively influenced such duration. Finally, when distinguishing between groups of currencies, it is observed that those in the core are more stable than those in the periphery, obtaining evidence against equality of survival functions among these groups of currencies. [ABSTRACT FROM AUTHOR]

In this study branching costs and competitiveness of European banks are measured by fitting a monopolistic competition model to a representative sample drawn from nine EEC banking industries in the period from 1990 to 1996. In the theoretical model, banks decide strategically the size of their branching network anticipating the degree of competition faced on interest rates. From the structural equations of the model an econometric test is derived in order to measure branching costs and degree of competition in banking services. The empirical analysis captures their changing over time together with the impact of various European directives aiming at deregulating the banking industry. Furthermore the study shows persistence of segmentation acoss EEC banking industries. [ABSTRACT FROM AUTHOR]

This article examines how a new market signal of inflation expectation could be used to inform the policy-maker when interest rates could be lowered without triggering inflation. Methodologies have been developed aimed at measuring the gilts (inflation-indexed government bonds) market's forecast of the future inflation path. A gilts market window on expectation can be used as a diagnostic tool both to examine why a macroeconomic model forecasts badly, and also to detect the extent to which an external shock has shifted market expectation away from its equilibrium path. It is only via changes in perception that the behaviour of economic agents and therefore the future can be influenced towards the policy target. The estimates suggest that it is technically possible with the indexed gilts method to read the financial markets forecast of the future inflation path in Great Britain. The expected inflation path alters in response to external shocks and to subsequent policy reaction, and these movements in market expectation can be monitored as they occur. In principle, the gilts market can provide "on-line" instantaneous information on movements in expected future inflation in response to external events, news, political speeches and most important, in response to proposed policy reactions to events even before they are implemented.