Good Luck or Good Policy? An Expectational Theory of Macro-Volatility Switches

Gaetano Gaballo

Working papers from Banque de France

Abstract: In an otherwise unique-equilibrium model, agents are segmented into a few informational islands according to the signal they receive about others' expectations. Even if agents perfectly observe fundamentals, rational-exuberance equilibria (REX) can arise as they put weight on expectational signals to refine their forecasts. Constant-gain adaptive learning can trigger jumps between the equilibrium where only fundamentals are weighted and a REX. This determines regime switching in macro volatility despite unchanged monetary policy and time-invariant distribution of exogenous shocks. In this context, a tight inflation-targeting policy can lower expectational complementarity preventing rational exuberance, although its effect is non-monotone.

Keywords: non-fundamental volatility; perpetual learning; comovements in expectations; professional forecasters. (search for similar items in EconPapers)
JEL-codes: D8 E3 E5 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2012
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Journal Article: Good luck or good policy? An expectational theory of macro volatility switches (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:402

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