This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. Journals
  3. American Economic Review
  4. June 2008
  5. Monetary Policy, Judgment, and Near-Rational Exuberance

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Monetary Policy, Judgment, and Near-Rational Exuberance

  • James Bullard
  • George W. Evans
  • Seppo Honkapohja
American Economic Review
vol. 98, no. 3, June 2008
(pp. 1163–77)
Download Full Text PDF

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.

Citation

Bullard, James, George W. Evans, and Seppo Honkapohja. 2008. "Monetary Policy, Judgment, and Near-Rational Exuberance." American Economic Review, 98 (3): 1163–77. DOI: 10.1257/aer.98.3.1163

Additional Materials

JEL Classification

  • E17 General Aggregative Models: Forecasting and Simulation
  • E31 Price Level; Inflation; Deflation
  • E52 Monetary Policy