A MODEL OF NEAR-RATIONAL EXUBERANCE

James Bullard, George W Evans, Seppo Honkapohja

    Research output: Contribution to journalArticlepeer-review

    15 Citations (Scopus)

    Abstract

    We study how the use of judgment or "add-factors" in forecasting may disturb the set of equilibrium outcomes when agents learn by 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.

    Original languageEnglish
    Pages (from-to)166-188
    Number of pages23
    JournalMacroeconomic Dynamics
    Volume14
    Issue number2
    DOIs
    Publication statusPublished - Apr 2010

    Keywords

    • Learning
    • Expectations
    • Excess Volatility
    • Bounded Rationality
    • MONETARY-POLICY
    • CONSISTENT EXPECTATIONS
    • STOCK-PRICES
    • CONVERGENCE
    • EQUILIBRIA
    • STABILITY
    • JUDGMENT

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