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Monetary Policy, Judgment, and Near-Rational Exuberance

Author

Listed:
  • James Bullard
  • George W. Evans
  • Seppo Honkapohja

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.

Suggested Citation

  • James Bullard & George W. Evans & Seppo Honkapohja, 2008. "Monetary Policy, Judgment, and Near-Rational Exuberance," American Economic Review, American Economic Association, vol. 98(3), pages 1163-1177, June.
    • Handle: RePEc:aea:aecrev:v:98:y:2008:i:3:p:1163-77
    Note: DOI: 10.1257/aer.98.3.1163
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    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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