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 language | English |
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Pages (from-to) | 166-188 |
Number of pages | 23 |
Journal | Macroeconomic Dynamics |
Volume | 14 |
Issue number | 2 |
DOIs | |
Publication status | Published - Apr 2010 |
Keywords
- Learning
- Expectations
- Excess Volatility
- Bounded Rationality
- MONETARY-POLICY
- CONSISTENT EXPECTATIONS
- STOCK-PRICES
- CONVERGENCE
- EQUILIBRIA
- STABILITY
- JUDGMENT