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

Christian R. Proaño and Benjamin Lojak
Authors registered in the RePEc Author Service: Christian R. Proaño

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

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)
Pages: 25 pages
Date: 2020-10
New Economics Papers: this item is included in nep-mac and nep-mon
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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:een:camaaa:2020-89

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