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Monetary policy, judgment and near-rational exuberance

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  • James B. 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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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2007-008.

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Date of creation: 2007
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Handle: RePEc:fip:fedlwp:2007-008

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Keywords: Rational expectations (Economic theory) ; Monetary policy;

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Cited by:
  1. 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.
  2. Murray, James, 2011. "Learning and judgment shocks in U.S. business cycles," MPRA Paper 29257, University Library of Munich, Germany.
  3. Hommes, C.H. & Zhu, M., 2012. "Behavioral Learning Equilibria," CeNDEF Working Papers 12-09, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  4. repec:dgr:uvatin:2013014 is not listed on IDEAS
  5. Evans, George & Bullard, James & Honkapohja, Seppo, 2009. "A Model of Near-Rational Exuberance," SIRE Discussion Papers 2009-11, Scottish Institute for Research in Economics (SIRE).
  6. Gaballo, G., 2012. "Good Luck or Good Policy? An Expectational Theory of Macro-Volatility Switches," Working papers 402, Banque de France.

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