Testing For Real Interest Rate Convergence In European Countries

We use cointegration tests that determine endogenously the regime shift to test for bilateral short‐term and long‐term real interest rate convergence in the European Monetary System in the 1979–1993 period. The results of these tests provide strong evidence in favour of bilateral real interest rate convergence between Germany and several countries in our sample, particularly for long‐term real interest rates. This result carries the important policy implication that in several European countries monetary policy has lost some of its effectiveness as a stabilisation policy tool.