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A Model Of Near-Rational Exuberance

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  • Bullard, James
  • Evans, George W.
  • Honkapohja, Seppo

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.
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  • Bullard, James & Evans, George W. & Honkapohja, Seppo, 2010. "A Model Of Near-Rational Exuberance," Macroeconomic Dynamics, Cambridge University Press, vol. 14(02), pages 166-188, April.
  • Handle: RePEc:cup:macdyn:v:14:y:2010:i:02:p:166-188_09
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Gaballo, Gaetano, 2013. "Good luck or good policy? An expectational theory of macro volatility switches," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2755-2770.
    2. Christian Hellwig & Laura Veldkamp, 2009. "Knowing What Others Know: Coordination Motives in Information Acquisition," Review of Economic Studies, Oxford University Press, vol. 76(1), pages 223-251.
    3. Roger E.A. Farmer & Carine Nourry & Alain Venditti, 2012. "The Inefficient Markets Hypothesis: Why Financial Markets Do Not Work Well in the Real World," NBER Working Papers 18647, National Bureau of Economic Research, Inc.
    4. Murray, James, 2011. "Learning and judgment shocks in U.S. business cycles," MPRA Paper 29257, University Library of Munich, Germany.
    5. Volha Audzei, 2012. "Efficiency of Central Bank Policy During the Crisis : Role of Expectations in Reinforcing Hoarding Behavior," CERGE-EI Working Papers wp477, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    6. Hommes, Cars & Zhu, Mei, 2014. "Behavioral learning equilibria," Journal of Economic Theory, Elsevier, vol. 150(C), pages 778-814.
    7. Elias, Christopher J., 2016. "A heterogeneous agent exchange rate model with speculators and non-speculators," Journal of Macroeconomics, Elsevier, vol. 49(C), pages 203-223.
    8. Georges, Christophre, 2008. "Staggered updating in an artificial financial market," Journal of Economic Dynamics and Control, Elsevier, vol. 32(9), pages 2809-2825, September.
    9. Cars Hommes, 2017. "From self-fulfilling mistakes to behavioral learning equilibria," Tinbergen Institute Discussion Papers 17-018/II, Tinbergen Institute.
    10. Volha Audzei, 2015. "Information Acquisition and Excessive Risk: Impact of Policy Rate and Market Volatility," ACTA VSFS, University of Finance and Administration, vol. 9(2), pages 115-135.
    11. Elias, Christopher J., 2016. "Asset pricing with expectation shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 65(C), pages 68-82.

    More about this item

    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

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