Rangvid, Jesper: Convergence in the ERM and Declining Numbers of Common Stochastic Trends
World Conference Econometric Society, 2000, Seattle

Jesper Rangvid, Copenhagen Business School
Carsten Sorensen, Copenhagen Business School
Convergence in the ERM and Declining Numbers of Common Stochastic Trends
Session: C-7-8  Sunday 13 August 2000  by Rangvid, Jesper
In this paper we analyze convergence of ERM currencies throughout the ERM period. We propose to use recursive and rolling cointegration methods when testing for a system of time series being within the process of convergence. We find that the number of cointegration vectors in a system of five 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. Furthermore, 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 and a non-linear. The overall conclusions are robust towards the different filtering procedures.


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