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Monetary Policy, Judgment, and Near-Rational Exuberance

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  • James Bullard
  • George W. Evans
  • Seppo Honkapohja

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.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.98.3.1163
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 98 (2008)
Issue (Month): 3 (June)
Pages: 1163-77

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Handle: RePEc:aea:aecrev:v:98:y:2008:i:3:p:1163-77

Note: DOI: 10.1257/aer.98.3.1163
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Cited by:
  1. Cars Hommes & Mei Zhu, 2013. "Behavioral Learning Equilibria," Tinbergen Institute Discussion Papers 13-014/II, Tinbergen Institute.
  2. Bullard, James & Evans, George W. & Honkapohja, Seppo, 2010. "A Model Of Near-Rational Exuberance," Macroeconomic Dynamics, Cambridge University Press, vol. 14(02), pages 166-188, April.
  3. Murray, James, 2011. "Learning and judgment shocks in U.S. business cycles," MPRA Paper 29257, University Library of Munich, Germany.
  4. Stephen Cole & Fabio Milani, 2014. "The Misspecification of Expectations in New Keynesian Models: A DSGE-VAR Approach," Working Papers 131407, University of California-Irvine, Department of Economics.
  5. Gaballo, G., 2012. "Good Luck or Good Policy? An Expectational Theory of Macro-Volatility Switches," Working papers 402, Banque de France.
  6. repec:dgr:uvatin:2013014 is not listed on IDEAS

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