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02 juni 2017 Onderzoek

Auteurs

  • Dennis Bonam
  • Gavin Goy
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. 
 
Keywords: monetary union, macroeconomic imbalances, home biased expectations, E-stability.
JEL classifications: E03, F44, F45.
  Working paper no. 556

556 - Home biased expectations and macroeconomic imbalances in a monetary union

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