The impact of the introduction of the euro on interest rates in EU member states : an analysis

Abstract

In this dissertation I will be demonstrating that it is useful to consider several complex factors in studying the relative movements of interest rates. Some of these factors are fiscal deficits, price stability, financial markets and risk premium. The key objective of this dissertation is to study the hypothesis that interest rates in the Euro area were significantly affected by the creation of the single currency. This dissertation aims to highlight the significant convergence of interest rates from the preparations for the third phase of the European Monetary Union (EMU) up to the present period, that is, four years after the creation of the Euro. A review of the present standing of the Euro area interest rates with respect to non-Euro area countries interest rates, which basically are Sweden, Denmark and the UK, is also carried out. In addition, as Greece is the last country which have adopted the Euro, an analysis of the convergence of the interest rates with those of the Euro area shall be studied. Finally, this dissertation evaluates whether the introduction of the new currency was the only force that caused interest rates to move and converge. Several studies show that this convergence of interest rates might not only be due to EMU, this is due to the fact that several other countries which did not adopt the Euro experienced the same interest rates movements.