Abstract
This note has examined interest rate and monetary base linkages within the EMS. Cointegration tests suggest the existence of a long-run equilibrium relationship between German and other EMS interest rates and German and other EMS country monetary bases in a number of cases. Bivariate VAR analysis suggested that Granger causality with respect to EMS interest rate linkages stemmed either from German to European markets or was bi-directional and that the monetary base linkages were overwhelmingly bi-directional. When allowance is made for the influence of US monetary policy developments, the pattern of Granger causality within the EMS is predominantly bi-directional. These findings may be attributable to integrated financial markets and the discipline of a formal exchange rate mechanism. Thus, our results fail to support the hypothesis that German monetary policy plays a dominant and independent role within the EMS. Rather, they suggest that monetary policies in the EMS mainly respond to each other and, to a very limited extent, to developments in US monetary policy.
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