A model of near-rational exuberance

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

No 2007-009, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We study how the use of judgment or "add-factors" in 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 a standard self-referential environment. Local indeterminacy is not a requirement for existence. We construct a simple asset pricing example and find that exuberance equilibria, when they exist, can be extremely volatile relative to fundamental equilibria.

Keywords: Monetary policy; Rational expectations (Economic theory) (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-for and nep-mac
Date: 2007
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