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The Lucas Critique in Practice: An Empirical Investigation of the Impact of European Monetary Integration on the Term Structure

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  • Peter A.G. VanBergeijk
  • Jan Marc Berk

Abstract

An empirical investigation of the term structure (the relation of the long interest rate to the short interest rate) showed structural change as the deadline for the euro became closer. Our empirical analysis of the term structures (yield curves) in 12 OECD countries uncovers that econometrically estimated behavioural equations for most EMU countries were stable even in the light of the creation of the euro. This finding would seem to defy the Lucas Critique. However, the significant structural instability found for the euro area's core country Germany suggests that the Lucas Critique is relevant in the analysis of the impact of the creation (and future extensions) of EMU.

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Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 082.

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Handle: RePEc:zur:iewwpx:082

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Keywords: Lucas Critique; Monetary Union; Term Structure;

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  1. Olivier J. Blanchard, 1984. "The Lucas Critique and the Volcker Deflation," NBER Working Papers 1326, National Bureau of Economic Research, Inc.
  2. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 1(1), pages 19-46, January.
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Cited by:
  1. Aleksander Berentsen & Guillaume Rocheteau, 2003. "Money and the Gains from Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(1), pages 263-297, February.
  2. Aleksander Berentsen & Guillaume Rocheteau, . "On the Efficiency of Monetary Exchange:How Divisibility of Money Matters," IEW - Working Papers, Institute for Empirical Research in Economics - University of Zurich 101, Institute for Empirical Research in Economics - University of Zurich.
  3. Reto Foellmi & Urs Meister, 2004. "Product-Market Competition in the Water Industry: Voluntary Nondiscriminatory Pricing," Working Papers, University of Zurich, Institute for Strategy and Business Economics (ISU) 0032, University of Zurich, Institute for Strategy and Business Economics (ISU).
  4. SANTOS, Carlos & OLIVEIRA, Maria Alberta, 2007. "Modelling The German Yield Curve And Testing The Lucas Critique, 1975-2001," Applied Econometrics and International Development, Euro-American Association of Economic Development, Euro-American Association of Economic Development, vol. 7(1).
  5. Rasmus Kattai, 2004. "Analyzing the Suitability of the Currency Board Arrangement for Estonia’s Accession to the EMU," University of Tartu - Faculty of Economics and Business Administration, Faculty of Economics and Business Administration, University of Tartu (Estonia), in: Modelling the Economies of the Baltic Sea Region, volume 17, chapter 6, pages 167-205 Faculty of Economics and Business Administration, University of Tartu (Estonia).
  6. Aleksander Berentsen & Guillaume Rocheteau, 2004. "Money and Information," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 71(4), pages 915-944, October.

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