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Institute of Economics

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  7. New BERG Working Paper No. 161 by Christian R. Proaño and Benjamin Lojak published!

New BERG Working Paper No. 161 by Christian R. Proaño and Benjamin Lojak published!

In the BERG Working Paper Series Christian R. Proaño and Benjamin Lojak have published a new paper entitled „Monetary Policy with a State-Dependent Inflation Target in a Behavioral Two-Country Monetary Union Model“.

A complete overview of all BERG Working Papers published so far can be found here.

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Abstract

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.