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American Economic Review: Vol. 98 No. 3 (June 2008)

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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

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)

JEL Classifications

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


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