IDEAS home Printed from https://ideas.repec.org/a/eee/ecmode/v26y2009i4p744-750.html
   My bibliography  Save this article

EMU and the Lucas Critique

Author

Listed:
  • Smith, Ron

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.

Suggested Citation

  • Smith, Ron, 2009. "EMU and the Lucas Critique," Economic Modelling, Elsevier, vol. 26(4), pages 744-750, July.
    • Handle: RePEc:eee:ecmode:v:26:y:2009:i:4:p:744-750
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0264-9993(08)00095-3
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Engle, Robert F. & Hendry, David F., 1993. "Testing superexogeneity and invariance in regression models," Journal of Econometrics, Elsevier, vol. 56(1-2), pages 119-139, March.
    2. Jesper Linde, 2001. "Testing for the Lucas Critique: A Quantitative Investigation," American Economic Review, American Economic Association, vol. 91(4), pages 986-1005, September.
    3. Filippo di Mauro & L. Vanessa Smith & Stephane Dees & M. Hashem Pesaran, 2007. "Exploring the international linkages of the euro area: a global VAR analysis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(1), pages 1-38.
    4. Psaradakis, Zacharias & Sola, Martin, 1996. "On the power of tests for superexogeneity and structural invariance," Journal of Econometrics, Elsevier, vol. 72(1-2), pages 151-175.
    5. James J. Heckman, 2008. "Econometric Causality," International Statistical Review, International Statistical Institute, vol. 76(1), pages 1-27, April.
    6. Ralf Brüggemann & Helmut Lütkepohl, 2006. "A small monetary system for the euro area based on German data," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(6), pages 683-702, September.
    7. Castelnuovo, Efrem, 2008. "Regime shifts and the stability of backward-looking Phillips curves in open economies," Journal of International Money and Finance, Elsevier, vol. 27(1), pages 40-53, February.
    8. Smith, R P, 1991. "Spurious Structural Stability," The Manchester School of Economic & Social Studies, University of Manchester, vol. 59(4), pages 419-423, December.
    9. Rudebusch, Glenn D, 2005. "Assessing the Lucas Critique in Monetary Policy Models," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(2), pages 245-272, April.
    10. Alogoskoufis, George S & Smith, Ron, 1991. "The Phillips Curve, the Persistence of Inflation, and the Lucas Critique: Evidence from Exchange-Rate Regimes," American Economic Review, American Economic Association, vol. 81(5), pages 1254-1275, December.
    11. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 15(30), pages 08-45.
    12. Hansen, Bruce E., 2000. "Testing for structural change in conditional models," Journal of Econometrics, Elsevier, vol. 97(1), pages 93-115, July.
    13. Emmanuel Dubois & Jérôme Hericourt & Valérie Mignon, 2007. "Costs and Benefits of Euro Membership: a Counterfactual Analysis," Working Papers 2007-17, CEPII research center.
    14. Charles Wyplosz, 2006. "European Monetary Union: the dark sides of a major success [‘The macroeconomics of low inflation’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 21(46), pages 208-261.
    15. M. Hashem Pesaran & Ron Smith, 2006. "Macroeconometric Modelling With A Global Perspective," Manchester School, University of Manchester, vol. 74(s1), pages 24-49, September.
    16. Stock, James H & Watson, Mark W, 1996. "Evidence on Structural Instability in Macroeconomic Time Series Relations," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(1), pages 11-30, January.
    17. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
    18. Pesaran, M. Hashem & Timmermann, Allan, 2007. "Selection of estimation window in the presence of breaks," Journal of Econometrics, Elsevier, vol. 137(1), pages 134-161, March.
    19. Christopher A. Sims, 1982. "Policy Analysis with Econometric Models," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 13(1), pages 107-164.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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. Karimova, Amira & Simsek, Esra & Orhan, Mehmet, 2020. "Policy implications of the Lucas Critique empirically tested along the global financial crisis," Journal of Policy Modeling, Elsevier, vol. 42(1), pages 153-172.
    3. 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.
    4. Pentecôte, Jean-Sébastien & Huchet-Bourdon, Marilyne, 2012. "Revisiting the core-periphery view of EMU," Economic Modelling, Elsevier, vol. 29(6), pages 2382-2391.
    5. Sandeep Mazumder, 2014. "European Monetary Union and the Cost of Disinflation," Economic Issues Journal Articles, Economic Issues, vol. 19(2), pages 1-20, September.
    6. Bagnai, Alberto & Granville, Brigitte & Mongeau Ospina, Christian A., 2017. "Withdrawal of Italy from the euro area: Stochastic simulations of a structural macroeconometric model," Economic Modelling, Elsevier, vol. 64(C), pages 524-538.
    7. María Santana-Gallego & Francisco Ledesma-Rodríguez & Jorge Pérez-Rodríguez, 2016. "The euro effect: Tourism creation, tourism diversion and tourism potential within the European Union," European Union Politics, , vol. 17(1), pages 46-68, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Karimova, Amira & Simsek, Esra & Orhan, Mehmet, 2020. "Policy implications of the Lucas Critique empirically tested along the global financial crisis," Journal of Policy Modeling, Elsevier, vol. 42(1), pages 153-172.
    2. E. Simsek & M. Orhan & F. Macit, 2017. "Effect of Government Expenditure on GDP in the Turkish Economy," International Econometric Review (IER), Econometric Research Association, vol. 9(2), pages 69-76, September.
    3. 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, vol. 7(1).
    4. Geweke, J. & Joel Horowitz & Pesaran, M.H., 2006. "Econometrics: A Bird’s Eye View," Cambridge Working Papers in Economics 0655, Faculty of Economics, University of Cambridge.
    5. Barbara Rossi, 2019. "Forecasting in the presence of instabilities: How do we know whether models predict well and how to improve them," Economics Working Papers 1711, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2021.
    6. Castelnuovo, Efrem, 2008. "Regime shifts and the stability of backward-looking Phillips curves in open economies," Journal of International Money and Finance, Elsevier, vol. 27(1), pages 40-53, February.
    7. Thomas A. Lubik & Paolo Surico, 2010. "The Lucas critique and the stability of empirical models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 177-194, January.
    8. M. Hashem Pesaran & L. Vanessa Smith & Ron P. Smith, 2007. "What if the UK or Sweden had joined the euro in 1999? An empirical evaluation using a Global VAR," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 12(1), pages 55-87.
    9. SOOREEA, Rajeev, 2007. "Are Taylor-Based Monetary Policy Rules Forward-Looking?. An Investigation Using Superexogeneity Tests," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 7(2), pages 87-94.
    10. Marçal, Emerson Fernandes & Cunha, Ronan & Merlin, Giovanni Tondin & Simões, Oscar, 2017. "The aftermath of 2008 turmoil on Brazilian economy: Tsunami or “Marolinha”?," Textos para discussão 459, FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil).
    11. J. Subrick & Andrew Young, 2010. "Nobelity and novelty: Finn Kydland and Edward Prescott’s contributions viewed from Vienna," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 23(1), pages 35-53, March.
    12. Boldea, Otilia & Hall, Alastair R., 2013. "Estimation and inference in unstable nonlinear least squares models," Journal of Econometrics, Elsevier, vol. 172(1), pages 158-167.
    13. Javier Andrés & Fernando Restoy, 2007. "Macroeconomic modelling in EMU: how relevant is the change in regime?," Working Papers 0718, Banco de España.
    14. Rossi, Barbara, 2013. "Advances in Forecasting under Instability," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 1203-1324, Elsevier.
    15. Davide Delle Monache & Ivan Petrella, 2014. "Adaptive Models and Heavy Tails," Working Papers 720, Queen Mary University of London, School of Economics and Finance.
    16. Kia, Amir & Darrat, Ali F., 2007. "Modeling money demand under the profit-sharing banking scheme: Some evidence on policy invariance and long-run stability," Global Finance Journal, Elsevier, vol. 18(1), pages 104-123.
    17. Duo Qin, 2014. "Inextricability of Autonomy and Confluence in Econometrics," Working Papers 189, Department of Economics, SOAS University of London, UK.
    18. Delle Monache, Davide & Petrella, Ivan, 2017. "Adaptive models and heavy tails with an application to inflation forecasting," International Journal of Forecasting, Elsevier, vol. 33(2), pages 482-501.
    19. Buch, Claudia M. & Vogel, Edgar & Weigert, Benjamin, 2018. "Evaluating macroprudential policies," ESRB Working Paper Series 76, European Systemic Risk Board.
    20. Hasanov, Mübariz & Araç, Aysen & Telatar, Funda, 2010. "Nonlinearity and structural stability in the Phillips curve: Evidence from Turkey," Economic Modelling, Elsevier, vol. 27(5), pages 1103-1115, September.

    More about this item

    Keywords

    EMU Lucas Critique Euro GVAR;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:26:y:2009:i:4:p:744-750. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/30411 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.