The ‘Fisher effect’ versus ‘German effect’ in European countries. An empirical study

Abstract

This paper analyses the impact of the rate of inflation and German short-term interest rates over the short-term interest rates of a number of European Union Member States. The study has been carried out by considering two subperiods, namely from 1980 to 1988 and from 1989 to 1996, with these representing the periods before and after the initiation of European Monetary Union. The results obtained indicate that there is one group of countries, comprising France and Italy, which has substituted the ‘inflation effect’ in the first period for the ‘German effect’ in the second. Another group, made up of Spain, Greece, Holland and Portugal, does not present evidence of the inflation effect prior to Monetary Union, but does present evidence of the ‘German effect’ after it. Finally, a number of other countries, such as the United Kingdom, Belgium and Denmark, are not seen to be influenced by changes in the German interest rate.