Interest Rate Convergence of the Spanish Economy towards European Monetary Union

Abstract

This paper examines whether there is convergence between the interest rates of the Spanish and German economies or at least with a weighted average of the European Union (EU). For this purpose a time series approach is adopted and some unit root tests allowing for structural breaks when the breakpoint is unknown are implemented. The empirical findings allow us to accept the long-term convergence hypothesis towards a weighted average of the EMS. The results also allow us to accept the existence of a catching up process in long-term interest rate differentials with Germany. Further evidence is obtained using the Kalman filter. This technique allows us to study in more detail the speed and evolution of the catching up processes.