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Assessing the Effects of Policy Changes: Lesson from the European 1992 Experience

  • Pierre-Yves HENIN
  • Marie PODEVIN

The paper focuses on the experience of the EMS breakdown in September 1992 as a 'crucial experiment', allowing to identify subsequent changes in policy rules and to assess the invariance of private agents' behaviour to these changes. After a brief summary of the facts, the breakdown and the aftermath, we provide estimates of the change in monetary and budget policy rules for Germany (the benchmark), two 'stayers' (France and the Netherlands) and three 'leavers' (Italy, Spain and the UK). Finally, we perform tests of super exogeneity and invariance of reduced form equations for real activity, inflation and the term structure of interest rates.

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Article provided by ENSAE in its journal Annals of Economics and Statistics.

Volume (Year): (2002)
Issue (Month): 67-68 ()
Pages: 435-461

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Handle: RePEc:adr:anecst:y:2002:i:67-68:p:16
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  1. Bryant, R.C. & Zhang, L., 1996. "Intertemporal Fiscal Policy in Macro-Economic Models: Introduction and Major Alternatives," Papers 123, Brookings Institution - Working Papers.
  2. Richard Clarida & Jordi Gali & Mark Gertler, 1997. "Monetary Policy Rules in Practice: Some International Evidence," NBER Working Papers 6254, National Bureau of Economic Research, Inc.
  3. Lars E.O. Svensson, 1992. "Why Exchange Rate Bands? Monetary Independence in Spite of Fixed Exchange Rates," NBER Working Papers 4207, National Bureau of Economic Research, Inc.
  4. Neil R. Ericsson & David F. Hendry, 1989. "Encompassing and rational expectations: how sequential corroboration can imply refutation," International Finance Discussion Papers 354, Board of Governors of the Federal Reserve System (U.S.).
  5. Hendry, David F., 1995. "Dynamic Econometrics," OUP Catalogue, Oxford University Press, number 9780198283164.
  6. Oliner, Stephen D. & Rudebusch, Glenn D. & Sichel, Daniel, 1996. "The Lucas critique revisited assessing the stability of empirical Euler equations for investment," Journal of Econometrics, Elsevier, vol. 70(1), pages 291-316, January.
  7. Laurence Ball, 1998. "Policy Rules for Open Economies," NBER Working Papers 6760, National Bureau of Economic Research, Inc.
  8. Miller, Preston J & Roberds, William T, 1991. "The Quantitative Significance of the Lucas Critique," Journal of Business & Economic Statistics, American Statistical Association, vol. 9(4), pages 361-87, October.
  9. Engle, R. & Hendry, D., 1990. "Testing Super Exogeneity And Invariance In Regression Models," Economics Series Working Papers 99100, University of Oxford, Department of Economics.
  10. Rose, A.K. & Svensson, L.E.O., 1993. "European Exchange Rate Credibility Before the Fall," Papers 542, Stockholm - International Economic Studies.
  11. Taylor, John B., 1999. "The robustness and efficiency of monetary policy rules as guidelines for interest rate setting by the European central bank," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 655-679, June.
  12. Fuhrer, Jeffrey C, 1996. "Monetary Policy Shifts and Long-Term Interest Rates," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 1183-1209, November.
  13. Revankar, Nagesh S & Yoshino, Naoyuki, 1990. "An 'Expanded Equation' Approach to Weak-Exogeneity Tests in Structural Systems and a Monetary Application," The Review of Economics and Statistics, MIT Press, vol. 72(1), pages 173-77, February.
  14. Blanchard, Olivier J, 1984. "The Lucas Critique and the Volcker Deflation," American Economic Review, American Economic Association, vol. 74(2), pages 211-15, May.
  15. Fischer, Andreas M & Peytrignet, Michel, 1991. "The Lucas Critique in Light of Swiss Monetary Policy," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 53(4), pages 481-93, November.
  16. Weber, Axel A., 1996. "Germany before and after unification: A structural VAR analysis," Economic Modelling, Elsevier, vol. 13(4), pages 575-601, October.
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