Monetary policy in a two-country model with behavioral expectations

Michal Brzoza-Brzezina, Paweł Galiński and Krzysztof Makarski

No 353, NBP Working Papers from Narodowy Bank Polski

Abstract: We study the working of monetary policy in an estimated two-country model with behavioral expectations(BE). We first show that the data favors this setting compared with the standard rational expectations assumption. Then we document several findings related to monetary policy in the open-economy framework. First, under BE the Taylor principle depends on the size of the economy - determinacy regions are larger for the small country. Second, both in the small and large economies, monetary policy is less powerful when agents are behavioral. Third, the sacrifice ratio faced by the central bank increases with agents becoming more behavioral (more in the small country). Fourth, BE help to partly solve the puzzles of excess foreign currency returns (UIP puzzle) and of international monetary independence.

Keywords: behavioral agents; monetary policy; open-economy model (search for similar items in EconPapers)
JEL-codes: E30 E43 E52 E70 (search for similar items in EconPapers)
Pages: 44
Date: 2022
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mon and nep-opm
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:nbp:nbpmis:353

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