Monetary policy convergence of potential EMU accession countries: A cointegration analysis with shifting regimes

Kasman A., Kirbas-Kasman S., Turgutlu E.

ECONOMIC MODELLING, vol.25, no.2, pp.340-350, 2008 (SSCI) identifier identifier

  • Publication Type: Article / Article
  • Volume: 25 Issue: 2
  • Publication Date: 2008
  • Doi Number: 10.1016/j.econmod.2007.06.004
  • Journal Name: ECONOMIC MODELLING
  • Journal Indexes: Social Sciences Citation Index (SSCI), Scopus
  • Page Numbers: pp.340-350
  • Keywords: monetary convergence, transition economies, uncovered interest parity, structural breaks
  • Dokuz Eylül University Affiliated: Yes

Abstract

This paper investigates monetary policy convergence between the reference country (Germany) and the new Central and Eastern European EU member countries as well as Malta and Cyprus during the process of joining the European Monetary Union (EMU) and the four candidate countries, Bulgaria, Romania, Croatia and Turkey. Monetary policy convergence is examined through testing the uncovered interest parity (UIP) hypothesis. The long-run relationship between interest rates, a necessary condition for testing the UIP hypothesis, is examined using a cointegration test that considers the presence of structural breaks. The empirical findings of this paper provide significant evidence to support that German interest rates and interest rates in six sample countries, Croatia, Estonia, Hungary, Romania, Slovak Republic, and Turkey are stochastically converging. The UIP hypothesis, however, is not rejected only for Estonia, Croatia, and Turkey. (C) 2007 Elsevier B.V. All rights reserved.