Monetary Policy, Judgment, and Near-Rational Exuberance
George W. Evans, and
Seppo Honkapohja. 2008. "Monetary Policy, Judgment, and Near-Rational Exuberance."
American Economic Review,
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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Bullard, James (Federal Reserve Bank of St Louis)
Evans, George W. (U OR)
Honkapohja, Seppo (Bank of Finland)
E17: General Aggregative Models: Forecasting and Simulation
E31: Price Level; Inflation; Deflation
E52: Monetary Policy