Monetary policy, judgment, and near-rational exuberance

James Bullard; George W Evans; Seppo Honkapohja

doi:10.1257/aer.98.3.1163

Monetary policy, judgment, and near-rational exuberance

James Bullard, George W Evans, Seppo Honkapohja

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

24 Citations (Scopus)

Abstract

We study how the use of judgment or "add-factors" in macroeconomic forecasting may disturb the set of equilibrium outcomes when agents learn using recursive methods. We examine the possibility of a new phenomenon, which we call exuberance equilibria, in the New Keynesian monetary policy framework. Inclusion of judgment in forecasts can lead to self-fulfilling fluctuations in a subset of the determinacy region. We study how policymakers can minimize the risk of exuberance equilibria.

Original language	English
Pages (from-to)	1163-1177
Number of pages	15
Journal	American Economic Review
Volume	98
Issue number	3
DOIs	https://doi.org/10.1257/aer.98.3.1163
Publication status	Published - Jun 2008

Keywords

CONSISTENT EXPECTATIONS
RULES

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10.1257/aer.98.3.1163

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Monetary policy, judgment, and near-rational exuberance

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Keywords

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