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The behavioral economics of currency unions: Economic integration and monetary policy

Author

Listed:
  • Akvile Bertasiute

    (Budget Policy Monitoring Department, National Audit Office of Lithuania)

  • Domenico Massaro

    (Universita Cattolica del Sacro Cuore & Complexity Lab in Economics)

  • Matthias Weber

    () (CEFER, Bank of Lithuania & Faculty of Economics, Vilnius University)

Abstract

Currency unions are often modeled as homogeneous economies, although they are fundamentally different. The expectations that impact macroeconomic behavior in any given country are not the expectations of variables at the currency-union level but at the country level. We model these expectations with a behavioral reinforcement learning model. In our model, economic integration is of particular importance in determining whether economic behavior in a currency union is stable. Monetary policy alone is insufficient to guarantee stable economic behavior, as the central bank cannot conduct different monetary policies in different countries. These results are easily overlooked when modeling expectations as rational.

Suggested Citation

  • Akvile Bertasiute & Domenico Massaro & Matthias Weber, 2018. "The behavioral economics of currency unions: Economic integration and monetary policy," Bank of Lithuania Working Paper Series 49, Bank of Lithuania.
  • Handle: RePEc:lie:wpaper:49
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    References listed on IDEAS

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    Cited by:

    1. Proaño Acosta, Christian & Lojak, Benjamin, 2020. "Monetary policy with a state-dependent inflation target in a behavioral two-country monetary union model," BERG Working Paper Series 161, Bamberg University, Bamberg Economic Research Group.
    2. Cornand, Camille & Hubert, Paul, 2020. "On the external validity of experimental inflation forecasts: A comparison with five categories of field expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 110(C).
    3. Jump, Robert Calvert & Levine, Paul, 2019. "Behavioural New Keynesian models," Journal of Macroeconomics, Elsevier, vol. 59(C), pages 59-77.
    4. Bonam, Dennis & Goy, Gavin, 2019. "Home biased expectations and macroeconomic imbalances in a monetary union," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 25-42.
    5. Weber, Matthias, 2019. "Behavioral Optimal Taxation: The Case of Aspirations," SocArXiv fpnw6, Center for Open Science.
    6. sonia KOUKI, 2019. "Analysis of Risk Premium Behavior in the Tunisian Foreign Exchange Market During Crisis Period," Journal of Academic Finance, RED research unit, university of Gabes, Tunisia, vol. 10(2), pages 28-38, December.
    7. De Grauwe, Paul & Foresti, Pasquale, 2020. "Animal Spirits and Fiscal Policy," Journal of Economic Behavior & Organization, Elsevier, vol. 171(C), pages 247-263.
    8. Hommes, Cars & Massaro, Domenico & Weber, Matthias, 2019. "Monetary policy under behavioral expectations: Theory and experiment," European Economic Review, Elsevier, vol. 118(C), pages 193-212.
    9. Donato Masciandaro & Davide Romelli, 2018. "To Be or not to Be a Euro Country? The Behavioural Political Economics of Currency Unions," BAFFI CAREFIN Working Papers 1883, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.

    More about this item

    Keywords

    Behavioral Macroeconomics; Monetary Unions; Reinforcement Learning; Expectation Formation;

    JEL classification:

    • E03 - Macroeconomics and Monetary Economics - - General - - - Behavioral Macroeconomics
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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