Monetary Policy with a State-Dependent Inflation Target in a Behavioral Two-Country Monetary Union Model
Date
2021
Authors
Proano, Christian R
Lojak, Benjamin
Journal Title
Journal ISSN
Volume Title
Publisher
Elsevier
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) may even lead to an enlarged fiscal space, i.e. a lower debt-to-GDP ratio if the risk premium's reaction to a higher inflation target is not too large.
Description
Keywords
Monetary Policy, Monetary Unions, Zero Lower Bound, Inflation Targets, Behavioral Macroeconomics
Citation
Collections
Source
Journal of Economic Dynamics and Control
Type
Journal article
Book Title
Entity type
Access Statement
License Rights
Restricted until
2099-12-31
Downloads
File
Description