A Model of Near-Rational Exuberance

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A Model of Near-Rational Exuberance

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James Bullard ()
George Evans ()
Seppo Honkapohja ()

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Abstract

We study how the use of judgement 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. learning, recurrent hyperinflations, and macroeconomic policy to combat liquidity traps and deflation.

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Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 0902.

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Date of creation: Feb 2009
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Handle: RePEc:san:cdmawp:0902

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Paper
- 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!]

Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

This paper has been announced in the following NEP Reports:

NEP-ALL-2009-03-07 (All new papers)
NEP-CBA-2009-03-07 (Central Banking)
NEP-DGE-2009-03-07 (Dynamic General Equilibrium)
NEP-MAC-2009-03-07 (Macroeconomics)
NEP-UPT-2009-03-07 (Utility Models & Prospect Theory)

References listed on IDEAS
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.:

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Other versions:
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Other versions:
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Other versions:
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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!]
- Christian Hellwig & Laura Veldkamp, 2009. "Knowing What Others Know: Coordination Motives in Information Acquisition," Review of Economic Studies, Blackwell Publishing, vol. 76(1), pages 223-251, 01. [Downloadable!] (restricted)

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