European Monetary Union, the term structure, and the Lucas Critique

Peter A.G. Vanbergeijk; Jan Marc Berk

European Monetary Union, the term structure, and the Lucas Critique

Peter A.G. Vanbergeijk, Jan Marc Berk

School of Business and Economics

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Abstract

In order to evaluate the empirical relevance of the Lucas Critique, weinvestigate whether the term structure (the relation of the long interest rate to theshort interest rate) showed structural change as the deadline for the euro becamecloser. Our empirical analysis of the term structures (yield curves) in 12 OECDcountries uncovers that econometrically estimated behavioural equations for mostEMU countries were stable even in the light of the creation of the euro. This findingwould seem to defy the Lucas Critique. However, fhe significant structural instabilityfound for the euro area's core country Germany suggests that the Lucas Critique isrelevant in the analysis of the impact of the creation (and future extensions) of EMU.

Original language	English
Place of Publication	Amsterdam
Publisher	Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam
Publication status	Published - 2001

Publication series

Name	Research Memorandum
No.	2001-13

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20010013Final published version, 124 KB

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Cite this

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