Monetary Policy, Judgment, and Near-Rational Exuberance

James Bullard, George Evans and Seppo Honkapohja

American Economic Review, 2008, vol. 98, issue 3, 1163-77

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.

JEL-codes: E17 E31 E52 (search for similar items in EconPapers)
Date: 2008
Note: DOI: 10.1257/aer.98.3.1163
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Citations: View citations in EconPapers (27)

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Working Paper: Monetary policy, judgment and near-rational exuberance (2007)
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