European Monetary Union: a cointegration analysis

This paper employs systems-based cointegration techniques developed by Johansen (1998, Journal of Economic Dynamics and Control 12, 231-254; 1995, Likelihood-based Inference in Cointegrated Vector Autoregressive Models, Oxford University Press) to determine which European Union countries would form a successful Economic and Monetary Union (EMU), based on long-run behavior of the nominal convergence criteria laid down in the Maastricht treaty. The original 12 European Union countries are analyzed together. Nominal exchange rates, real exchange rates, long-term interest rates, and government budget deficits are each analyzed for co-movements among the 12 countries and various subgroups of them. The results suggest that not all of the 12 original countries of the European Union can form a successful EMU over time, unless several countries make significant adjustments. (C) 2000 Elsevier Science Ltd. All rights reserved.