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Monetary Policy, Judgment, and Near-Rational Exuberance

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Author Info
James Bullard
George W. Evans
Seppo Honkapohja

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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://hdl.handle.net/10.1257/aer.98.3.1163
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File URL: http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=3&article=26&issue_date=June2008
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Publisher 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

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  1. James B. Bullard & George W. Evans & Seppo Honkapohja, 2007. "A model of near-rational exuberance," Working Papers 2007-009, Federal Reserve Bank of St. Louis. [Downloadable!]
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This page was last updated on 2009-11-16.

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