Convergence in the ERM and Declining Numbers of Common Stochastic Trends

Research output: Working paperResearch

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Abstract

In this paper, we use recursive and rolling cointegration methods to test for a system of several exchange rates being within the process of convergence. We use the methods to analyze how the convergence of five ERM exchange rates has developed during the ERM period. We find that the number of cointegration vectors in the system of ERM exchange rates increases as the sample period is extended, and interpret this as a sign of increased convergence of ERM exchange rates. In particular, we find no evidence of convergence in the first years of the ERM and strong evidence of convergence in the last years of the ERM. In the analyses we acknowledge that managed exchange rates, such as exchange rates in ERM target zones, can be misaligned at their observed values as compared to their fundamental free-float values. For this reason, we also study convergence of filtered shadow exchange rates. We use two filters to extract the shadow exchange rates: a linear filter and a non-linear filter.
Original languageEnglish
Place of PublicationFrederiksberg
PublisherInstitut for Finansiering, Copenhagen Business School
Number of pages24
Publication statusPublished - Nov 2000
SeriesWorking Papers / Department of Finance. Copenhagen Business School
Number2000-8
ISSN0903-0352

Keywords

  • Target zones
  • Shadow exchange rates
  • Convergence
  • Recursive and rolling cointegration tests

Cite this

Rangvid, J., & Sørensen, C. (2000). Convergence in the ERM and Declining Numbers of Common Stochastic Trends. Frederiksberg: Institut for Finansiering, Copenhagen Business School. Working Papers / Department of Finance. Copenhagen Business School, No. 2000-8
Rangvid, Jesper ; Sørensen, Carsten. / Convergence in the ERM and Declining Numbers of Common Stochastic Trends. Frederiksberg : Institut for Finansiering, Copenhagen Business School, 2000. (Working Papers / Department of Finance. Copenhagen Business School; No. 2000-8).
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abstract = "In this paper, we use recursive and rolling cointegration methods to test for a system of several exchange rates being within the process of convergence. We use the methods to analyze how the convergence of five ERM exchange rates has developed during the ERM period. We find that the number of cointegration vectors in the system of ERM exchange rates increases as the sample period is extended, and interpret this as a sign of increased convergence of ERM exchange rates. In particular, we find no evidence of convergence in the first years of the ERM and strong evidence of convergence in the last years of the ERM. In the analyses we acknowledge that managed exchange rates, such as exchange rates in ERM target zones, can be misaligned at their observed values as compared to their fundamental free-float values. For this reason, we also study convergence of filtered shadow exchange rates. We use two filters to extract the shadow exchange rates: a linear filter and a non-linear filter.",
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Rangvid, J & Sørensen, C 2000 'Convergence in the ERM and Declining Numbers of Common Stochastic Trends' Institut for Finansiering, Copenhagen Business School, Frederiksberg.

Convergence in the ERM and Declining Numbers of Common Stochastic Trends. / Rangvid, Jesper; Sørensen, Carsten.

Frederiksberg : Institut for Finansiering, Copenhagen Business School, 2000.

Research output: Working paperResearch

TY - UNPB

T1 - Convergence in the ERM and Declining Numbers of Common Stochastic Trends

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AB - In this paper, we use recursive and rolling cointegration methods to test for a system of several exchange rates being within the process of convergence. We use the methods to analyze how the convergence of five ERM exchange rates has developed during the ERM period. We find that the number of cointegration vectors in the system of ERM exchange rates increases as the sample period is extended, and interpret this as a sign of increased convergence of ERM exchange rates. In particular, we find no evidence of convergence in the first years of the ERM and strong evidence of convergence in the last years of the ERM. In the analyses we acknowledge that managed exchange rates, such as exchange rates in ERM target zones, can be misaligned at their observed values as compared to their fundamental free-float values. For this reason, we also study convergence of filtered shadow exchange rates. We use two filters to extract the shadow exchange rates: a linear filter and a non-linear filter.

KW - Valutakurser

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KW - Euro

KW - ØMU

KW - Target zones

KW - Shadow exchange rates

KW - Convergence

KW - Recursive and rolling cointegration tests

M3 - Working paper

T3 - Working Papers / Department of Finance. Copenhagen Business School

BT - Convergence in the ERM and Declining Numbers of Common Stochastic Trends

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Rangvid J, Sørensen C. Convergence in the ERM and Declining Numbers of Common Stochastic Trends. Frederiksberg: Institut for Finansiering, Copenhagen Business School. 2000 Nov.