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Macroeconomic Risk, Fiscal Policy Rules and Aggregate Volatility in Asymmetric Currency Unions: A Behavioral Perspective

In: Inequality and Finance in Macrodynamics

Author

Listed:
  • Christian R. Proaño

    (Otto-Friedrich-Universität Bamberg)

  • Benjamin Lojak

    (Otto-Friedrich-Universität Bamberg)

Abstract

This paper studies the dynamics of sovereign risk, fiscal policy and the macroeconomy in a two-country monetary union framework under the assumption of a heterogeneous perception of the determinants of sovereign risk by the government and the market participants. The macro-economic volatility resulting from various types of fiscal policy rules aimed at the stabilization of sovereign debt is investigated through numerical simulations. Among other things, these simulations show that an extreme focus on debt stabilization can be counterproductive if the financial markets care more about the country’s output gap.

Suggested Citation

  • Christian R. Proaño & Benjamin Lojak, 2017. "Macroeconomic Risk, Fiscal Policy Rules and Aggregate Volatility in Asymmetric Currency Unions: A Behavioral Perspective," Dynamic Modeling and Econometrics in Economics and Finance, in: Bettina Bökemeier & Alfred Greiner (ed.), Inequality and Finance in Macrodynamics, pages 221-242, Springer.
    • Handle: RePEc:spr:dymchp:978-3-319-54690-2_10
    DOI: 10.1007/978-3-319-54690-2_10
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    Cited by:

    1. Proaño, Christian R. & Lojak, Benjamin, 2021. "Monetary Policy with a State-Dependent Inflation Target in a Behavioral Two-Country Monetary Union Model," Journal of Economic Dynamics and Control, Elsevier, vol. 133(C).

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