Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/224487
Authors: 
Proaño Acosta, Christian
Lojak, Benjamin
Year of Publication: 
2020
Series/Report no.: 
BERG Working Paper Series 161
Abstract: 
In this paper we study the implementation of a state-dependent inflation target in a two-country monetary union model characterized by boundedly rational agents. In particular, we use the spread between the actual policy rate (which is constrained by the zero-lower-bound) and the Taylor rate (which can become negative) as a measure for the degree of ineffectiveness of conventional monetary policy as a stabilizing mechanism. The perception of macroeconomic risk by the agents is assumed to vary according to this measure by means of the Brock-Hommes switching mechanism. Our numerical simulations indicate a) that a state-dependent inflation target may lead to a better macroeconomic and inflation stabilization, and b) the perceived risk-sharing among the monetary union members influences the financing conditions of the member economies of the monetary union.
Subjects: 
Monetary Policy
Monetary Unions
Zero Lower Bound
Inflation Targets
Behavioral Macroeconomics
JEL: 
E52
E7
F02
ISBN: 
978-3-943153-82-8
Document Type: 
Working Paper

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