Home biased expectations and macroeconomic imbalances in a monetary union

Bonam, Dennis and Goy, Gavin,(2019), Home biased expectations and macroeconomic imbalances in a monetary union. , Journal of Economic Dynamics & Control, UNSPECIFIED

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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 adjust- ment 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 macroe- conomic imbalances.
Keywords : Monetary union Macroeconomic imbalances Home biased expectations E-stability, UNSPECIFIED
Journal or Publication Title: Journal of Economic Dynamics & Control
Volume: 103
Item Type: Article
Subjects: Ekonomi Pembangunan
Depositing User: Elok Inajati
Date Deposited: 30 Dec 2019 07:14
Last Modified: 30 Dec 2019 07:14
URI: https://repofeb.undip.ac.id/id/eprint/1199

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