Bank of Lithuania
4886_7170dedea63196ce6b3855a597f02f91.png
2018-04-27

No 49. Akvile Bertasiute, Domenico Massaro, Matthias Weber. The behavioral economics of currency unions: Economic integration and monetary policy

4886_7170dedea63196ce6b3855a597f02f91.png
5

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.

JEL Codes: E03, F45, E52, D84.

The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

Domenico Massaro, Matthias Weber, reinforcement learning