Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/152989
Authors: 
Bullard, James
Evans, George W.
Honkapohja, Seppo
Year of Publication: 
2005
Series/Report no.: 
ECB Working Paper 555
Abstract: 
We study how the use of judgement or “add-factors” in macroeconomic forecasting may disturb the set of equilibrium outcomes when agents learn using recursive methods. We isolate conditions under which new phenomena, which we call exuberance equilibria, can exist in standard macroeconomic environments. Examples include a simple asset pricing model and the New Keynesian monetary policy framework. Inclusion of judgement in forecasts can lead to self-fulfilling fluctuations, but without the requirement that the underlying rational expectations equilibrium is locally indeterminate. We suggest ways in which policymakers might avoid unintended outcomes by adjusting policy to minimize the risk of exuberance equilibria.
Subjects: 
bounded rationality
excess volatility
expectations
Learning
monetary policy
JEL: 
E52
E61
Document Type: 
Working Paper

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