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The roles of economic integration and monetary policy in currency unions

A. Bertasiute, D. Massaro, M. Weber, (2018), “The roles of economic integration and monetary policy in currency unions”, VoxEU, 7 July

Macroeconomics has often been criticised for assuming rational expectations. Indeed, the assumption that all firms and consumers in an economy form their expectations in full awareness of all information and all underlying relationships in the economy is extremely unrealistic. Therefore, economists have started building macroeconomic models that are based on non-rational expectations (e.g. Branch and McGough 2009, Kurz et al. 2013). However, alternative methods of expectation formation have not yet been thoroughly incorporated into international macroeconomics. In a recent paper, we investigate a currency union model in which expectations are formed according to a behavioural reinforcement learning model (Bertasiute et al. 2018). The latter was previously validated on microeconomic data (Assenza et al. 2013, Hommes et al. 2017). Reinforcement learning refers to agents learning from their past mistakes; while they do not know the exact economic laws governing outcomes in an economy, they are smart enough to rely predominantly on forecasting strategies that performed well in the past.

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