A MODEL OF NEAR-RATIONAL EXUBERANCE

James Bullard; George W Evans; Seppo Honkapohja

doi:10.1017/S1365100509090208

A MODEL OF NEAR-RATIONAL EXUBERANCE

James Bullard, George W Evans, Seppo Honkapohja

Research output: Contribution to journal › Article › peer-review

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
Pages (from-to)	166-188
Number of pages	23
Journal	Macroeconomic Dynamics
Volume	14
Issue number	2
DOIs	https://doi.org/10.1017/S1365100509090208
Publication status	Published - Apr 2010

Keywords

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

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AU - Evans, George W

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AB - 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.

KW - Learning

KW - Expectations

KW - Excess Volatility

KW - Bounded Rationality

KW - MONETARY-POLICY

KW - CONSISTENT EXPECTATIONS

KW - STOCK-PRICES

KW - CONVERGENCE

KW - EQUILIBRIA

KW - STABILITY

KW - JUDGMENT

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VL - 14

SP - 166

EP - 188

JO - Macroeconomic Dynamics

JF - Macroeconomic Dynamics

IS - 2

ER -

A MODEL OF NEAR-RATIONAL EXUBERANCE

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Keywords

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