Is the European Monetary System converging to integration?

TL;DR

This paper investigates whether the European Monetary System is becoming more integrated by analyzing the system's stability and convergence using information theory and Markov properties, especially after currency crises.

Contribution

It introduces an information theoretical model to assess systemness and convergence in the European Monetary System, considering the impact of currency crises and different country behaviors.

Findings

Increasing integration observed in monetary and economic dimensions since 1992-1993 crises.

Countries with strong ties to the German Mark show different dynamics from others.

European inflation and exchange rate developments are related to global trends.

Abstract

The emerging system at the European level can be conceptualized as a pattern of relations among member states that tends to be reproduced despite disturbances in individual trajectories. The Markov property is used as an indicator of systemness in the distribution. The individual trajectories of nations participating in the European Monetary System is assessed using an information theoretical model that is consistent with the Markov property in the multivariate case. Economic and monetary integration are analyzed using independent data sets. Increasing integration can be retrieved in both of these dimensions, notably since the currency crises of 1992 and 1993. However, the dynamics for countries which have strongly coupled their currency to the German Mark are different from those which did not. Additionally, developments in inflation and exchange rates at the European level are assessed in relation to global developments.