We use cointegration tests that determine endogenously the regime shift to
test for bilateral short-term and long-term real interest rate convergence
in the European Monetary System in the 1979-1993 period. The results of the
se tests provide strong evidence in favour of bilateral real interest rate
convergence between Germany and several countries in our sample, particular
ly for long-term real interest rates. This result carries the important pol
icy implication that in several European countries monetary policy has lost
some of its effectiveness as a stabilisation policy tool.