Monetary policy, judgment and near-rational exuberance

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

No 2007-008, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We study how the use of judgment or "add-factors" in macroeconomic forecasting may disturb the set of equilibrium outcomes when agents learn using recursive methods. We examine the possibility of a new phenomenon, which we call exuberance equilibria, in the New Keynesian monetary policy framework. Inclusion of judgment in forecasts can lead to self-fulfilling fluctuations in a subset of the determinacy region. We study how policymakers can minimize the risk of exuberance equilibria.

Keywords: Rational expectations (Economic theory); Monetary policy (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-for, nep-mac and nep-mon
Date: Written
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Journal Article: Monetary Policy, Judgment, and Near-Rational Exuberance (2008)
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