2018
DOI: 10.2139/ssrn.3169793
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The Behavioral Economics of Currency Unions: Economic Integration and Monetary Policy

Abstract: We analyze different behavioral models of expectation formation in a multi-country New Keynesian currency union model. Our analyses yield the following robust results. First, economic integration is of crucial importance for the stability of the economic dynamics in a currency union. Second, when the economic dynamics are unstable, more activist monetary policy does not lead to stable economic dynamics. These findings have natural counterparts in the rational expectations version of the model: there, economic … Show more

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Cited by 12 publications
(7 citation statements)
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“…For a nice and rather comprehensive overview of macroexperiments, seeDuffy (2016). Behavioural macroeconomic theory papers have also recently built upon experiments, e.g., De Grauwe and Macchiarelli (2015),Cole and Milani (2017), andBertasiute et al (2018), to mention but a few. 2 In LtFE, participants in the experiment play the role of professional forecasters.…”
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confidence: 99%
“…For a nice and rather comprehensive overview of macroexperiments, seeDuffy (2016). Behavioural macroeconomic theory papers have also recently built upon experiments, e.g., De Grauwe and Macchiarelli (2015),Cole and Milani (2017), andBertasiute et al (2018), to mention but a few. 2 In LtFE, participants in the experiment play the role of professional forecasters.…”
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confidence: 99%
“…Introducing the evolutionary learning model of expectation formation into a macroeconomic monetary union model is what we do in Bertasiute et al (2020a). In that article, we provide the first behavioral multi-country New Keynesian monetary union model.…”
Section: Hommes Et Al (mentioning
confidence: 99%
“…Such a quantitative model should then come together with sound behavioral assumptions about human behavior (the parameters of which would have to be estimated). This includes assuming present-biasedness and procrastination (e.g., O'Donoghue and Rabin, 2001;Burks et al, 2012;Sutter et al, 2013), expectation formation according to a reinforcement learning model (e.g., Heemeijer et al, 2009;Hommes, 2011;Bertasiute et al, 2018), and other-regarding behavior in the labor market (e.g., Fehr et al, 1998;Brandts et al, 2010;Casoria and Riedl, 2013). Some additional inclusions may have effects similar to those of aspirations (for example the introduction of different skill levels most likely makes a lump-sum tax unattractive as it does not account for the skill differences), others may have the opposite effect (for example present-biasedness, which should lead to agents supplying insufficient labor rather than excessive labor).…”
Section: Possible Extensions and Criticisms Of The Modelmentioning
confidence: 99%