Loading…
Home biased expectations and macroeconomic imbalances in a monetary union
Under monetary union, economic dynamics may diverge across countries due to regional inflation differentials and a pro-cyclical real interest rate channel, yet stability is generally ensured through endogenous adjustment of the real exchange rate. The speed of adjustment depends, inter alia, on the...
Saved in:
Published in: | Journal of economic dynamics & control 2019-06, Vol.103, p.25-42 |
---|---|
Main Authors: | , |
Format: | Article |
Language: | English |
Subjects: | |
Citations: | Items that this one cites Items that cite this one |
Online Access: | Get full text |
Tags: |
Add Tag
No Tags, Be the first to tag this record!
|
Summary: | Under monetary union, economic dynamics may diverge across countries due to regional inflation differentials and a pro-cyclical real interest rate channel, yet stability is generally ensured through endogenous adjustment of the real exchange rate. The speed of adjustment depends, inter alia, on the way agents’ form expectations. We propose a model in which agents expectations are largely based on domestic variables, and less so on foreign variables. We show that such home bias in expectations strengthens the real interest rate channel and causes country-specific shocks to generate larger and more prolonged macroeconomic imbalances. |
---|---|
ISSN: | 0165-1889 1879-1743 |
DOI: | 10.1016/j.jedc.2019.04.004 |