European integration and asymmetry in the EMS

The empirical literature offers conflicting views of German dominance in th e European Monetary System. We examine the validity of the German dominance hypothesis (GDH) by analyzing the responses of European central banks and money markets to monetary innovations originating both in Europe (European asymmetry) and abroad (international asymmetry). Our results reconcile the conflicting views in the literature. The GDH is confirmed when the analysis is conducted with intervention rates before German unification. Results su pport European asymmetry with short rates before 1990 but not international asymmetry. After 1990 the GDH is not supported by either set of rates. (C) 1999 Published by Elsevier Science Ltd. All rights reserved.