Macroeconomic instability in the European monetary system?

This article analyses the impact of the establishment of the European Monetary System (EMS) on a number of macroeconomic variables, such as exchange rates, money, interest rates and prices for member countries participating in the Exchange Rate Mechanism (ERM). Instability is examined in terms of multiple structural breaks in the variance of the series. Two procedures are followed for this purpose: the OLS-based tests to detect multiple structural breaks, as proposed by Bai and Perron (1998, 2003), and several procedures based on Information Criterion together with the so-called sequential procedure suggested by Bai and Perron (2003). Results indicate that there is some evidence of structural breaks in volatility across investigated variables, with the realignments in the ERM playing a significant role in reducing volatility in some countries and sub-periods. In this regard, the results tend to support the hypothesis that the EMS has contributed to reducing macroeconomic volatility in member countries.