Shock Therapy in Transition Countries: A Behavioral Macroeconomic Approach
In: Comparative economic studies
ISSN: 1478-3320
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In: Comparative economic studies
ISSN: 1478-3320
In: CESifo Working Paper Series No. 7181
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Modern macroeconomics has been based on the paradigm of the rational individual capable of understanding the complexity of the world. Challenging this paradigm using simple rules of behaviour this book applies a new model to real-life macroeconomic problems.
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In: CESifo Working Paper No. 10741
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We revisit the fragility of the Eurozone which arises because the sovereigns in the Eurozone issue debt in a currency (the euro) over which they have no control. This prevents them from giving a guarantee to bond holders that they will always be repaid at maturity. This fragility can trigger self-fulfilling liquidity crises, such as those that erupted during 2010–12. We document how this fragility has evolved over time and how it has been affected by the reforms in the governance of the Eurozone since the sovereign debt crisis of 2010–12. This will allow us to analyze the most recent episode that started with the emergence of the pandemic in 2020. The latter has, up to now, not led to a new debt crisis in the Eurozone, despite the fact that the shock produced by the pandemic was at least as large as the financial crisis of 2007–08. We document how during the pandemic the new governance of the Eurozone prevented this shock from leading to a new sovereign debt crisis. We end with a discussion of the prospects for the future and ask the question of whether the fragility of the Eurozone is a thing of the past.
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In: CESifo Working Paper No. 8853
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Working paper
In: Journal of common market studies: JCMS, Volume 58, Issue S1
ISSN: 1468-5965
In: CEPR Discussion Paper No. DP14540
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Working paper
In: Journal of common market studies: JCMS, Volume 57, Issue S1, p. 40-48
ISSN: 1468-5965
In: Comparative economic studies, Volume 60, Issue 2, p. 203-216
ISSN: 1478-3320
In: Economica, Volume 86, Issue 342, p. 262-299
ISSN: 1468-0335
We analyse the relationship between the level of the inflation target and the zero lower bound imposed on the nominal interest rate in the framework of a behavioural New‐Keynesian macroeconomic model in which agents, experiencing cognitive limitations, use adaptive learning forecasting rules. The model produces endogenous waves of optimism and pessimism (animal spirits) that lead to non‐normal distributions of the output gap. We find that when the inflation target is too close to zero, the economy can get gripped by 'chronic pessimism' that leads to a dominance of negative output gaps and recessions, and in turn feeds back on expectations producing long waves of pessimism. Low inflation targets create the risk of persistence of recessions and low growth. In conclusion, our framework suggests that the 2% inflation target, now pursued by many central banks, is too low.
In: Comparative Economic Studies, Volume 60, Issue 2
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In: CEPS Policy Insight, No 2018-08/February 2018
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