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

Author

Listed:
  • Christian R. Proano
  • Benjamin Lojak

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 particular, 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 measure 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.

Suggested Citation

  • Christian R. Proano & Benjamin Lojak, 2020. "Monetary Policy with a State-Dependent Inflation Target in a Behavioral Two-Country Monetary Union Model," CAMA Working Papers 2020-89, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2020-89
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    Cited by:

    1. Savin, Ivan & Mundt, Philipp, 2022. "Drivers of productivity change in global value chains: Reallocation vs. innovation," Economics Letters, Elsevier, vol. 220(C).
    2. Christian R. Proaño & Giorgos Galanis & Juan Carlos Peña, 2025. "On the macro-political dynamics of conflict inflation," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 20(3), pages 725-745, July.
    3. Gardini, Laura & Radi, Davide & Schmitt, Noemi & Sushko, Iryna & Westerhoff, Frank, 2023. "Sentiment-driven business cycle dynamics: An elementary macroeconomic model with animal spirits," Journal of Economic Behavior & Organization, Elsevier, vol. 210(C), pages 342-359.
    4. Sahm, Marco, 2022. "Optimal accuracy of unbiased Tullock contests with two heterogeneous players," BERG Working Paper Series 175, Bamberg University, Bamberg Economic Research Group.
    5. Mundt, Philipp & Cantner, Uwe & Inoue, Hiroyasu & Savin, Ivan & Vannuccini, Simone, 2021. "Market selection in global value chains," BERG Working Paper Series 170, Bamberg University, Bamberg Economic Research Group.
    6. Philipp Mundt & Simone Alfarano & Mishael Milaković, 2022. "Survival and the Ergodicity of Corporate Profitability," Management Science, INFORMS, vol. 68(5), pages 3726-3734, May.
    7. Maybrit Wachter & Christian R. Proano & Juan Carlos Pena, 2024. "How Fitting is "one-size-fits-all"? Revisiting the Dynamic Effects of ECB's Interest Policy on Euro Area Countries," CAMA Working Papers 2024-77, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    8. Schulz, Jan & Mayerhoffer, Daniel M., 2021. "A network approach to consumption," BERG Working Paper Series 173, Bamberg University, Bamberg Economic Research Group.

    More about this item

    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E7 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics
    • F02 - International Economics - - General - - - International Economic Order and Integration

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