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EMU and the Lucas Critique

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  • Smith, Ron
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    Abstract

    This paper attempts to provide a systematic review of the implications of EMU for the Lucas Critique. It asks how well cointegrating vector autoregressions estimated on pre-Euro data forecast post-Euro data, relative to their pre-Euro standard error. This is done for the Euro area as a whole, 3 countries that joined and 3 European countries that did not join. If the Lucas Critique is important, the forecasts should be much worse, because the policy change, EMU which changed exchange rate and interest rate determination processes, should have changed the parameters of the estimated models. The models appear to forecast very well and EMU does not appear to have induced structural change, indicating that the Lucas Critique does not seem to be important in this case.

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    Bibliographic Info

    Article provided by Elsevier in its journal Economic Modelling.

    Volume (Year): 26 (2009)
    Issue (Month): 4 (July)
    Pages: 744-750

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    Handle: RePEc:eee:ecmode:v:26:y:2009:i:4:p:744-750

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    Web page: http://www.elsevier.com/locate/inca/30411

    Related research

    Keywords: EMU Lucas Critique Euro GVAR;

    References

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    Cited by:
    1. Çakır, Mustafa Yavuz & Kabundi, Alain, 2013. "Trade shocks from BRIC to South Africa: A global VAR analysis," Economic Modelling, Elsevier, vol. 32(C), pages 190-202.
    2. Yeh, Kuo-chun & Ho, Tai-kuang, 2011. "ERM crisis in retrospect: What if a European central bank had been in existence before 1992?," Economic Modelling, Elsevier, vol. 28(4), pages 1526-1535, July.
    3. Pentecôte, Jean-Sébastien & Huchet-Bourdon, Marilyne, 2012. "Revisiting the core-periphery view of EMU," Economic Modelling, Elsevier, vol. 29(6), pages 2382-2391.

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