Monetary policy with a state-dependent inflation target in a behavioral two-country monetary union model

Arbeitspapier

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.

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• ISBN: 978-3-943153-82-8
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: BERG Working Paper Series ; No. 161

Classification and Topics

• Classification: Wirtschaft ; Monetary Policy ; International Economic Order and Integration
• Subject: Monetary Policy ; Monetary Unions ; Zero Lower Bound ; Inflation Targets ; Behavioral Macroeconomics

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Proaño Acosta, Christian ; Lojak, Benjamin
• Event: Veröffentlichung
• (who): Bamberg University, Bamberg Economic Research Group (BERG)
• (where): Bamberg
• (when): 2020

Further information

• Handle: http://hdl.handle.net/10419/224487