‘Home bias’ in expectations heightens shocks – paper

The Netherlands Bank

A working paper published by the Netherlands Bank presents a model for a two-country monetary union in which agents’ expectations are “largely based on domestic variables, and less so on foreign variables”.

In Home biased expectations and macroeconomic imbalances in a monetary union, Dennis Bonam and Gavin Goy use the model to examine the effects of an asymmetric shock would be on the monetary union.

This home bias in expectations, the authors say, strengthens the real interest rate channel

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