LINKAGE IN EMS TERM STRUCTURES - EVIDENCE FROM COMMON TREND AND TRANSITORY COMPONENTS

We test for the link among selected EMS term structures during 1979-95 . By decomposing each term structure into its common trend and transit ory components, we find that EMS common trends move together over time , that the German trend is not the driving source of the shared co-mov ements, and that the transitory components ('spread') are more loosely linked in recent years perhaps due to widened exchange rate bands. Ou r findings refute arguments that Germany plays a dominant role in sett ing policy and raise doubts that it will play a dominant role if and w hen EMU takes place. (C) 1997 Elsevier Science Ltd.