| The existence of the channels of transmission of German disinflation, the reserve country, to the rest of the participating countries in the Exchange Rate Mechanism (ERM) as well as the timing at which the ERM became effective were tested, using time series techniques (Vector Autoregression and Recursive Residual). The data included monetary, price and income variables from both participating countries (Germany, Belgium, Denmark, France, Italy, Netherlands) and non-participating ones (Greece, Portugal, Spain and the United Kingdom). The data set consisted of monthly observations which began in 1969 and ended in 1989.;Two-, three- and four-variables unconstrained Vector Autoregression models were used to determine Granger causality between German variables and foreign variables and to test for the existence of the monetary inflation and the direct foreign price effect transmission channels.;It was found that ERM became effective in 1982 and that German disinflation is transmitted basically through the monetary path of inflation transmission that was mostly evident in the ERM countries. The direct inflation transmission path was found to be present in some ERM countries and was evident in the non-ERM countries as well. |
