Near-rational exuberance

James Bullard (), George William Evans () and Seppo Mikko Sakari Honkapohja ()

No 555, Working Paper Series from European Central Bank

Abstract: We study how the use of judgement or “add-factors” in macroeconomic forecasting may disturb the set of equilibrium outcomes when agents learn using recursive methods. We isolate conditions under which new phenomena, which we call exuberance equilibria, can exist in standard macroeconomic environments. Examples include a simple asset pricing model and the New Keynesian monetary policy framework. Inclusion of judgement in forecasts can lead to self-fulfilling fluctuations, but without the requirement that the underlying rational expectations equilibrium is locally indeterminate. We suggest ways in which policymakers might avoid unintended outcomes by adjusting policy to minimize the risk of exuberance equilibria.

Keywords: Learning; expectations; excess volatility; bounded rationality; monetary policy. (search for similar items in EconPapers)
JEL-codes: E52 E61 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk and nep-mac
Date: 2005-11
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Related works:
Working Paper: Near-Rational Exuberance (2006)
Working Paper: Near-Rational Exuberance (2005)
Working Paper: Near-Rational Exuberance (2004)
Working Paper: Near-rational exuberance (2004)
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