Did markets expect Italy to join EMU? Evidence from options markets

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This note quantifies the movements in the distribution of future short-term market interest rates in reaction to the selection of countries that were to participate in stage three of Economic and Monetary Union as of 1 January 1999. We conclude that, before the various national central banks and the European Monetary Institute published their convergence reports, financial markets were already convinced that Italy would participate. They furthermore interpreted these reports, when published, as an indication that Italy would indeed participate. The official decision in May 1998 therefore came as no surprise.