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Rational exuberance booms

Author

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  • Gene Ambrocio

    (Bank of Finland)

Abstract

I provide a theory of information production and learning that can help account for both the excessive optimism that fueled booms preceding crises and the slow recoveries that followed. In my theory, persistence and the size of expectation errors depend on information production about changes in aggregate fundamentals. In turn information production, via credit screening, tends to fall during both very good and very bad times. The former gives rise to episodes of rational exuberance in which optimistic beliefs may sustain booms even as fundamentals decline. I also document evidence from survey forecasts consistent with the model predictions. (Copyright: Elsevier)

Suggested Citation

  • Gene Ambrocio, 2020. "Rational exuberance booms," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 263-282, January.
  • Handle: RePEc:red:issued:18-163
    DOI: 10.1016/j.red.2019.07.002
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Daron Acemoglu & Ufuk Akcigit & Douglas Hanley & William Kerr, 2016. "Transition to Clean Technology," Journal of Political Economy, University of Chicago Press, vol. 124(1), pages 52-104.
    2. Ambrocio, Gene, 2017. "The real effects of overconfidence and fundamental uncertainty shocks," Research Discussion Papers 37/2017, Bank of Finland.
    3. Eerola, Essi & Saarimaa, Tuukka, 2015. "Who benefits from public housing?," Research Discussion Papers 30/2015, Bank of Finland.

    More about this item

    Keywords

    Business cycles; Credit screening; Information choice; Social learning;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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