A MODEL OF NEAR-RATIONAL EXUBERANCE

James Bullard, George Evans and Seppo Honkapohja

Macroeconomic Dynamics, 2010, vol. 14, issue 2, 166-188

Abstract: We study how the use of judgment or “add-factors” in forecasting may disturb the set of equilibrium outcomes when agents learn by 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.

Date: 2010
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Related works:
Working Paper: A Model of Near-Rational Exuberance (2009)
Working Paper: A model of near-rational exuberance (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:14:y:2010:i:02:p:166-188_09

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