INTEREST-RATE LINKAGES WITHIN THE EUROPEAN MONETARY-SYSTEM - AN ALTERNATIVE INTERPRETATION

In this note the empirical evidence presented by Karfakis and Moschos (1990) and Katsimbris and Miller (1993) on interest rate linkages in t he EMS is reinterpreted and their finding of non-stationarity of inter est rate differentials in the EMS is rationalized. It is argued that t heir results are not counterintuitive if it is taken into account that the integration of financial markets in the EMS has been a gradual pr ocess, which has implied slow convergence of interest rates to German levels. Such a dynamic process accounts for the non-stationarity of in terest rate differentials. However, the argument that standard parity conditions require pairwise cointegration of interest rates is a valid one once convergence has been achieved.