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American Economic Review: Vol. 98 No. 3 (June 2008)
AER Volume. 98, Issue 3 | 
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Monetary Policy, Judgment, and Near-Rational Exuberance
Article 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
DOI: 10.1257/aer.98.3.1163
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.
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Authors
Bullard, James (Federal Reserve Bank of St Louis)
Evans, George W. (U OR)
Honkapohja, Seppo (Bank of Finland)
Evans, George W. (U OR)
Honkapohja, Seppo (Bank of Finland)
JEL Classifications
E17: General Aggregative Models: Forecasting and Simulation
E31: Price Level; Inflation; Deflation
E52: Monetary Policy
E31: Price Level; Inflation; Deflation
E52: Monetary Policy
