It is well-known that the high synchronization of the business cycles among industrial countries cannot easily be replicated in standard open economy macroeconomic models without assuming that the exogenous shocks hitting these countries are highly correlated. We develop a two-country behavioral...

Serial correlation in macroeconomics is pervasive. Macroeconomic modellers find it impossible to model this feature without relying on serially correlated shocks. Using a behavioral macroeconomic model, I show that serial correlation in inflation and output can easily be explained in the context...

The optimal currency areas (OCA) theory has been influential in pushing eurozone countries towards structural reforms to make product and labour markets more flexible. The underlying assumption of the OCA prescription for structural reform is that asymmetric shocks are permanent. However, when...