A Model of Near-Rational Exuberance

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

CDMA Working Paper Series from Centre for Dynamic Macroeconomic Analysis

Abstract: We study how the use of judgement 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. learning, recurrent hyperinflations, and macroeconomic policy to combat liquidity traps and deflation.

Keywords: Learning; expectations; excess volatility; bounded rationality. (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-cba, nep-dge, nep-mac and nep-upt
Date: 2009-02

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Related works:
Working Paper: A model of near-rational exuberance (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:san:cdmawp:0902

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