European and international asymmetry in the volatility transmission mechanism: the “German Dominance Hypothesis” revisited

Abstract

This paper re-examines the volatility transmission mechanism within the European Monetary System (EMS) and revisits the “German Dominance Hypothesis” using short-term interest rates. The results support German dominance within EMS, but not in a strict sense, since Germany’s short-term rates are also affected by its partners. When including the US interest rate, neither the German nor the US rate surface as predominant players in the volatility transmission mechanism. A final finding is absence of asymmetric behavior within EMS after Germany’s reunification due to the rapid convergence of the EMS countries as they prepared for monetary union.