Tests for interest rate convergence and structural breaks in the EMS: further analysis

In this paper the linkages existing between the interest rates within the European Union countries are assessed, to discover if the Exchange Rate Mechanism has led to a converging process. This hypothesis is tested using the uncovered interest rate parity relative to the Maastricht Treaty’s interest rate criterion. The obtained results allow classification of the European countries from the point of view of the degree of convergence already achieved. The techniques used are unit roots, allowing for endogenously determined changes in the deterministic trends of the data, as well as the Kalman filter, which permits the convergence path of the series to be followed.