EMU and the Lucas Critique

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. (C) 2008 Elsevier B.V. All rights reserved.