European and International Asymmetry in the Volatility Transmission Mechanism : The 'German Dominance Hypothesis' Revisited

This paper re-examines the volatility transmission mechanism within EMS and revisits the 'German Dominance Hypothesis' using short-term interest rates. The results, basically, support the idea of a German predominance within the European Monetary System, but not in a strict sense, since Germany's short-term rates are also affected by actions from its partners. When including the US short-term interest rate, neither the German nor the US rate surface as predominant players in the volatility transmission mechanism. This is explained by the fact that during Germany's post-unification era, the EMS and US monetary policies were diverging. A final finding refers to the absence of asymmetric behavior within EMS after Germany's reunification due to the rapid convergence of the EMS countries as they prepare for the anticipated monetary union