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In past research on the long-run behaviour of exchange rates the possibility of cointegration among spot rates has been rejected. This rejection is surprising as some exchange rates are bound by official agreements to comove over time. The European Monetary System (EMS) is an example of such an officially coordinating system. In this paper we extend past research by focusing on only EMS rates and use potentially more powerful cointegration tests to show that EMS rates are cointegrated. [ABSTRACT FROM AUTHOR]

This paper argues that the effectiveness of the exchange rate mechanism (ERM) of the European Monetary System (EMS) should be gauged by its impact on the monetary component of real exchange rate variability. Nominal and real shocks are separated using a bivariate structural VAR applied to real exchange rate data of the six original member countries participating in the ERM and a control group consisting of Britain and the United States. The findings suggest that monetary shocks have been an important source of real exchange rate variability and that the ERM has been successful in reducing the incidence of monetary shocks across its member countries prior to the EMS currency crises of 1992-93, while being less successful thereafter. [ABSTRACT FROM AUTHOR]

We study the effects of the announcements of ECB asset purchases and of financial stability measures in the euro area in the wake of the global financial crisis and the euro area sovereign debt crisis on 10-year government bond term premia in 11 euro area countries. We find that the term premia of euro area countries with higher sovereign risk, as measured by sovereign CDS spreads, decreased more in response to the announcements of asset purchases and financial stability measures. Term premia of countries with lowest sovereign risk either increased as in Germany, or were not significantly affected or fell slightly, as in the Netherlands and Finland. [ABSTRACT FROM AUTHOR]

This article compares the size of government spending multipliers in Europe by applying a panel structural vector autoregression analysis on 11 eurozone and 8 non-eurozone countries using quarterly data from 1991Q1 to 2012Q4. We find that (i) spending multipliers are smaller in eurozone compared to non-eurozone countries, (ii) across the euro area the impact of government spending on GDP has been higher before than after the introduction of the euro, (iii) spending multipliers are larger in the eurozone periphery than in the core countries and (iv) since the beginning of the recent financial crisis, spending multipliers have become larger both for eurozone and for non-eurozone countries. We relate these results to an emerging theoretical literature linking the size of fiscal multipliers to the monetary policy stance. We also discuss the implications of our findings for the effectiveness of fiscal policy in Europe. [ABSTRACT FROM PUBLISHER]

This paper aims at investigating the behavior of risk premia of currencies participating in the European Monetary System (EMS) against the dollar. For this purpose a multivariate GARCH-in-mean model is specified, allowing the risk premia of EMS currencies other than the deutschmark to be determined as a function of their conditional covariance with the deutschmark/dollar exchange rate. The risk premium of the latter is determined by its own conditional variance. The model is able to capture the time-varying character of the relationship between EMS currencies and the deutschmark. Furthermore, the model allows us to examine how changes in the conditional variances and covariances of future exchange rates affect the level of current exchange rates. [ABSTRACT FROM AUTHOR]

This article analyses financial markets' reaction to European Central Bank's (ECB) communication. We apply a novel indicator that quantifies the contents of the ECB's introductory statements and allows disentangling ECB statements on prices, the real and the monetary sector. We provide evidence that it matters what issue the ECB is speaking about: especially, the ECB's statements on price developments represent important news to financial markets. It also matters when the ECB affects markets: communication drives maturities above 4 months. [ABSTRACT FROM AUTHOR]

This article investigates whether there has been a structural increase in financial market integration in nine European countries and the US in the period 1980 to 2003. We employ a GARCH model with a smoothly time-varying correlation to estimate the date of change and the speed of the transition between the low and high correlation regimes. Our test produces strong evidence of greater comovement across the board for both stock markets and government bond markets. Dates of change and speeds of adjustment vary widely across country linkages. Stock market integration is a more gradual process than bond market integration. The impact of European monetary union (EMU) is rather limited, as it has mainly affected the timing of bond market correlation gains (but hardly their size) and has had little discernible effect on stock market integration. [ABSTRACT FROM AUTHOR]

We evaluate the performance of composite leading indicators of turning points of inflation in the Euro area, constructed by combining the techniques of Fourier analysis and Kalman filters with the National Bureau of Economic Research methodology. In addition, the study compares the empirical performance of Euro Simple Sum and Divisia monetary aggregates and provides a tentative answer to the issue of whether or not the UK should join the Euro area. Our findings suggest that, first, the cyclical pattern of the different composite leading indicators very closely reflect that of the inflation cycle for the Euro area; second, the empirical performance of the Euro Divisia is better than its Simple Sum counterpart and third, the UK is better out of the Euro area. [ABSTRACT FROM AUTHOR]

We analyse the disinflationary experience between 1979-93 for two traditionally inflationary countries of the European Monetary System: France and Italy. For each country, a vector autoregressive model is estimated. Shocks in the model combine domestic and foreign sources. The latter capture the world oil price shocks as well as nominal and real shocks originating in Germany. Under investigation is the hypothesis that shocks originating in Germany have a spillover disinflationary effect in France and Italy. The empirical evidence provides support to the validity of this hypothesis. Furthermore, German shocks account for an important share of the total price variance in France and Italy. These results indicate that the interaction between countries of the European Monetary System has contributed to the success of the disinflationary experiences of the 1980s. The evidence sheds, therefore, some light on potential benefits that may be further realized as countries of the European Monetary System move towards their objective of achieving a single currency under a united monetary system. [ABSTRACT FROM AUTHOR]