Macroeconomic Risk, Fiscal Policy Rules and Aggregate Volatility in Asymmetric Currency Unions: A Behavioral Perspective

Abstract

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. -------

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

“…As the "close but below 2%" inflation target by the European Central Bank (ECB) may represent a significant constraint for the macroeconomic flexibility of at least some of the economies within the euro area, it is worthwhile to investigate the potential benefits and drawbacks of a possible varying inflation target in a monetary union context. In particular, we focus on the risk-sharing aspect of monetary unions such as the euro area (Jaumotte and Sodsriwiboon, 2010, De Grauwe and Ji, 2013Proaño et al, 2014, Proaño and Lojak, 2017, and how the risk premium charged on government bonds can be affected by the ZLB.…”