Monetary Policy, Judgment, and Near-Rational Exuberance

James B. Bullard; George W. Evans; Seppo Honkapohja

doi:10.1257/aer.98.3.1163

American Economic Review Vol. 98 No. 3 2008

Monetary Policy, Judgment, and Near-Rational Exuberance

James B. Bullard¹; George W. Evans²; Seppo Honkapohja³

¹ Research Division, Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, MO 63166-0442. · ² Department of Economics, University of Oregon, Eugene, OR 97403-1285. · ³ Bank of Finland, P.O. Box 160, FIN-00101 Helsinki, Finland.

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.

DOI: 10.1257/aer.98.3.1163
Volume: 98
Issue: 3
Pages: 1163-1177
Language: en
Sources: bibtex:phds-export.bib openalex crossref

Monetary Policy, Judgment, and Near-Rational Exuberance

Abstract

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