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The behavioral economics of currency unions: Economic integration and monetary policy

Akvile Bertasiute, Domenico Massaro and Matthias Weber
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Akvile Bertasiute: Budget Policy Monitoring Department, National Audit Office of Lithuania

No 49, Bank of Lithuania Working Paper Series from Bank of Lithuania

Abstract: Currency unions are often modeled as homogeneous economies, although they are fundamentally different. The expectations that impact macroeconomic behavior in any given country are not the expectations of variables at the currency-union level but at the country level. We model these expectations with a behavioral reinforcement learning model. In our model, economic integration is of particular importance in determining whether economic behavior in a currency union is stable. Monetary policy alone is insufficient to guarantee stable economic behavior, as the central bank cannot conduct different monetary policies in different countries. These results are easily overlooked when modeling expectations as rational.

Keywords: Behavioral Macroeconomics; Monetary Unions; Reinforcement Learning; Expectation Formation (search for similar items in EconPapers)
JEL-codes: E03 F45 E52 D84 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cmp, nep-mac, nep-mon, nep-opm and nep-pke
Date: 2018-04-27
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