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

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.