Good Luck or Good Policy? An Expectational Theory of Macro-Volatility Switches
AbstractIn an otherwise unique-equilibrium model, agents are segmented into a few informational islands according to the signal they receive about others' expectations. Even if agents perfectly observe fundamentals, rational-exuberance equilibria (REX) can arise as they put weight on expectational signals to refine their forecasts. Constant-gain adaptive learning can trigger jumps between the equilibrium where only fundamentals are weighted and a REX. This determines regime switching in macro volatility despite unchanged monetary policy and time-invariant distribution of exogenous shocks. In this context, a tight inflation-targeting policy can lower expectational complementarity preventing rational exuberance, although its effect is non-monotone.
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Bibliographic InfoPaper provided by Banque de France in its series Working papers with number 402.
Length: 38 pages
Date of creation: 2012
Date of revision:
non-fundamental volatility; perpetual learning; comovements in expectations; professional forecasters.;
Find related papers by JEL classification:
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-11-03 (All new papers)
- NEP-MAC-2012-11-03 (Macroeconomics)
- NEP-MON-2012-11-03 (Monetary Economics)
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