Monetary Policy with a State-Dependent Inflation Target in a Behavioral Two-Country Monetary Union Model

Beschreibung

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 par- ticular, 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 mea- sure 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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Christian R. Proaño

Themen in »Monetary Policy with a State-Dependent Inflation Target in a Behavioral Two-Country Monetary Union Model«

Behavioral Macroeconomics Inflation Targets Monetary Policy Monetary Unions Zero Lower Bound

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