MONETARY INTEGRATION IN EUROPE - IMPLICATIONS FOR REAL INTEREST-RATESAND STOCK MARKETS

We calibrate a simple general equilibrium model to assess the implicat ions of financial market integration on real interest rates and equity prices in Germany, France, Italy and the U.K. We consider a flexible exchange rate regime, a hard EMS, and a common currency. We find that the effect of these regime changes on real interest rates (via the ris k premium) should be small, but the effect on equity prices is potenti ally large. Moreover, the choice of central bank operating procedures may also be important for real interest rates.