In this paper we investigate the risk-related effects of monetary policy in normal times, as well as in periods where the zero lower bound (ZLB) binds, in a stylized macroeconomic model with boundedly rational beliefs. In our model, financial market participants use heuristics to assess the risk premium over the policy rate in accordance to an "implicit Taylor rule" that measures the stance of conventional monetary policy and which serves as an informative instrument during times when the funds rate is constrained by the ZLB. In such a case, conventional monetary policy is exhausted so that the central bank is forced to use unconventional types of policy. We propose alternative monetary policy measures to help the economy out of the liquidity trap which take into account this assumed form of bounded rationality.

This paper aims to provide a modeling framework that keeps track of the interdependency between firms’ external financing structure and the state of the economy. Accordingly, it is based on the well‐known Kaleckian model which is combined with a modeling strategy of a sentiment index that was proposed by Franke (2012, 2014). The sentiment influences firms’ subjective sales expectations and thus their planned level of investment. As it turns out, the non‐linear model set‐up appears to be flexible in the sense that it is able to generate different interesting dynamic scenarios. It is shown that it may produce (a) sentiment‐driven business cycle fluctuations, including endogenously determined Minsky‐Koo‐kind recessions, and, more interestingly, (b) two distinct economic environments that exist contemporaneously: a ‘low‐’ and ‘high‐indebted’ regime.

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThis paper studies the dynamics of macroeconomic risk, fiscal policy and the macroeconomy in a two-country monetary union framework, under the assumption that agents do not have rational expectations, but use heuristics to determine their consumption over time, as well as to assess macroeconomic risk. Further, the macroeconomic consequences of a divergence between the design of fiscal policy and the behavioral perception of macroeconomic risk by the financial markets are investigated using numerical simulations. Among other things, these simulations show that an extreme focus on debt stabilization can be counterproductive if the financial markets care more about other indicators, such as the country's output gap or external imbalances. -------

In this paper we investigate the risk-related effects of monetary policy in normal times, as well as in periods where the zero lower bound (ZLB) binds, in a stylized macroeconomic model with boundedly rational beliefs. In our model, financial market participants use heuristics to assess the risk premium over the policy rate in accordance to an "implicit Taylor rule" that measures the stance of conventional monetary policy and which serves as an informative instrument during times when the funds rate is constrained by the ZLB. In such a case, conventional monetary policy is exhausted so that the central bank is forced to use unconventional types of policy. We propose alternative monetary policy measures to help the economy out of the liquidity trap which take into account this assumed form of bounded rationality.

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