The impact of the Maastricht Treaty on the link between budget deficits and interest rates, capital market integration, and German dominance.

摘要

This dissertation consists of three essays. Each essay is distinct in the sense that it studies its own topic. Although distinct, the essays are motivated by a common thread—institutions resulting from the Maastricht Treaty.; The first essay applies a cointegrating approach to determine if the requirement of a deficit to GDP ratio of less than three percent (fiscal convergence criteria) has had any impact on the link between budget deficits and long-term interest rates for nine European countries and the US. Only a handful of studies have applied a cointegration technique to this link for the US, and none have examined the link for such an extensive set of European countries. The results of this analysis show a positive impact of budget deficits on long-term interest rates in only two of the ten countries—Germany and the Netherlands.; The second essay examines how the elimination of remaining capital controls by the Maastricht Treaty has impacted the extent of capital market integration between the EU, the US, and Japan. It seems obvious that by eliminating capital controls this treaty would have resulted in a significant increase in the extent of capital market integration between these countries. The results show only a slight increase, which suggests that the capital markets of these countries were already significantly integrated prior to the Maastricht Treaty. This result is surprising since several of the EU countries had effective capital controls in place during this time. This essay also examines what impact an exchange rate mechanism and high versus low inflation have had on the extent of capital market integration between these countries.; The third essay analyzes the strong and weak form versions of the German Dominance Hypothesis. This Hypothesis requires fixed exchange rates and free flowing capital—each a result of the Maastricht Treaty. The Granger-causality tests reject the strong form both before and after the Maastricht Treaty. The innovation accounting approach leads to a visual rejection of the weak version. It appears the bands of the exchange rate mechanism allow enough flexibility for the non-German EU central bank to conduct independent monetary policy.