Monetary Policy, Judgment, and Near-Rational Exuberance
AbstractWe 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.
CitationBullard, 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
- E17 General Aggregative Models: Forecasting and Simulation
- E31 Price Level; Inflation; Deflation
- E52 Monetary Policy