In the paper we analyse the question whether interest rate policies and / or nominal as well as real exchange rate changes served as a national policy instrument in the past to either protect one country from foreign shocks or to move towards more convergence over the business cycle across countries. The countries included are Austria, the Netherland and France as representatives of more stable countries. West Germany is used as the reference country by constructing GDP growth differentials as well as differentials in the unemployment rates. For the sample period 1974 to 1996 we estimate the potential impact of nominal short term interest rate differential and nominal and real exchange rate changes on these variables. Our main result suggests that interest rate policy acted as a shock-absorber in countries and subperiods where national interest rates were isolated from the German rate. For Austria and the Netherlands interest rate differentials and nominal exchange rate changes have not acted as shock-absorbers since the mid-1980s. With respect to growth differentials exchange rates were to a larger extent shock-absorbing than with regard to the labour markets where we obtain mixed results.


European Monetary Union,Monetary Instruments,Shock Absorption