Financial markets' assessments of EMU

Abstract

This paper reviews the assumptions and methodologies underlying “EMU probability calculators,” which infer from financial data the probability of specific countries joining the European Monetary Union. Some historical evidence is presented in support of the expectations hypothesis for intra-European interest-rate differentials underlying most calculators, while various potential biases are deemed negligible. The various EMU calculators differ primarily in their scenarios for intra-European interest-rate differentials conditional upon EMU not occurring. This paper also discusses what can be inferred from financial data regarding future policies of the European Central Bank.