A model of near-rational exuberance

James Bullard, George Evans and Seppo 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)
Date: 2007
New Economics Papers: this item is included in nep-cba, nep-for and nep-mac
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: A MODEL OF NEAR-RATIONAL EXUBERANCE (2010)
Working Paper: A Model of Near-Rational Exuberance (2009)
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