Financial and Currency Integration in the European Monetary System: The Statistical Record
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The paper documents econometrically the trend toward financial and monetary integration among the countries of the EMS. The first half of the paper examines return
differentials among European countries. Short-term nominal interest differentials have fallen. What is the role of county factors (e.g., capital controls) versus currency factors (e.g., exchange risk premia)? To find out, we look directly at covered interest differentials, measured with the aid of forward rate data, and exchange risk premia, measured with the aid of survey data on exchange rate expectations. The second half of the paper examines the credibility of the EMS, essentially updating the results and condensing the presentation in "The European Monetary System: Credible at Last?" We find evidence that the danger of realignment perceived by investors was lower in 1990-91 than previously. The overall conclusion is that all components of the interest differential fell during the course of the 1980s.