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

Christian Proaño and Benjamin Lojak

No 161, BERG Working Paper Series from Bamberg University, Bamberg Economic Research Group

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.

Keywords: Monetary Policy; Monetary Unions; Zero Lower Bound; Inflation Targets; Behavioral Macroeconomics (search for similar items in EconPapers)
JEL-codes: E52 E7 F02 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-cba, nep-cmp, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Monetary Policy with a State-Dependent Inflation Target in a Behavioral Two-Country Monetary Union Model (2021)
Working Paper: Monetary policy with a state-dependent inflation target in a behavioral two-country monetary union model (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bamber:161

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