A Model of Near-Rational Exuberance

George Evans, James Bullard and Seppo Honkapohja

No 2009-11, SIRE Discussion Papers from Scottish Institute for Research in Economics (SIRE)

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.

Keywords: Learning; expectations; excess volatility; bounded rationality (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: A MODEL OF NEAR-RATIONAL EXUBERANCE (2010)
Working Paper: A model of near-rational exuberance (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:edn:sirdps:122

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