A model of near-rational exuberance

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A model of near-rational exuberance

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James B. Bullard
George W. Evans
Seppo Honkapohja

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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.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2007-009.

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Date of creation: 2007
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Handle: RePEc:fip:fedlwp:2007-009

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This paper has been announced in the following NEP Reports:

NEP-ALL-2007-03-31 (All new papers)
NEP-CBA-2007-03-31 (Central Banking)
NEP-FOR-2007-03-31 (Forecasting)
NEP-MAC-2007-03-31 (Macroeconomics)

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Other versions:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Hellwig, Christian & Veldkamp, Laura, 2007. "Knowing What Others Know: Coordination Motives in Information Acquisition," CEPR Discussion Papers 6506, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Other versions:
- Laura Veldkamp & Christian Hellwig, 2006. "Knowing What Others Know: Coordination Motives in Information Acquisition," Working Papers 06-14, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
- Christian Hellwig & Laura Veldkamp, 2006. "Knowing what others Know: Coordination motives in information acquisition," 2006 Meeting Papers 361, Society for Economic Dynamics. [Downloadable!]

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