Monetary Convergence after German Reunification: Evidence from Regional Data

This paper employs regional deposit data to document the process of monetary convergence following German reunification. A simple model for the velocity of deposits shows that long-run co-integration relationships between velocity and interest rates can be found in the western states, suggesting that the East-German monetary shock has not destabilized monetary relationships within West-Germany. For the eastern states, no convincing evidence for a co-integration relationship can be found. The findings offer some lessons for European monetary policy. The strong monetary coherence found among West-German states corroborates earlier findings of monetary coherence inside the United States. We may expect a similar coherence in the EMU, though the speed of adjustment of East-German monetary developments to western patterns suggests that this may be a lengthy process.