We hold the fort for linear specification of monetary policy and economic activity in Europe. Using data on the last two and a half decades we cannot reject the hypothesis that monetary policy is a linear process and we find mixed results regarding economic activity.

We show that, complementary to trade and financial linkages, the strength of the banking sector helps explain the transmission of currency crises. Specifically, we demonstrate that the Mexican, Thai, and Russian crises predominantly spread to countries with weaknesses in their banking sectors....