Who is ruling Europe? Empirical Evidenceon the German Dominance Hypothesis

The aim of this paper is to analyze the hypotheses of German dominanceand asymmetry in the European Monetary System (EMS).Weuse monthly data for British, Dutch, French, German, Italian, Spanishand US interest rates from January 1979 to the second half of 1997. Inparticular, we test the stability of the implied long-run relationshipsto assess whether there has been a signi…cant change in the EMSperformance. The econometric methodology is based on Johansen’smaximum likelihood procedure and several tests for parameter instability.The most important …nding is that despite it is not possibleto accept both dominance and asymmetry in an strict sense, there isenough evidence to support the existence of German leadership...