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Good luck or good policy? An expectational theory of macro volatility switches

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  • Gaballo, Gaetano

Abstract

In an otherwise unique-equilibrium model, agents are segmented into a few informational islands according to the signal they receive about others' expectations. Even if agents perfectly observe fundamentals, rational-exuberance equilibria (REX) can arise as they put weight on expectational signals to refine their forecasts. Constant-gain adaptive learning can trigger jumps between the equilibrium where only fundamentals are weighted and a REX. This determines regime switching in macro volatility despite unchanged monetary policy and time-invariant distribution of exogenous shocks. In this context, a tight inflation-targeting policy can lower expectational complementarity preventing rational exuberance, although its effect is non-monotone.

Suggested Citation

  • Gaballo, Gaetano, 2013. "Good luck or good policy? An expectational theory of macro volatility switches," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2755-2770.
    • Handle: RePEc:eee:dyncon:v:37:y:2013:i:12:p:2755-2770
    DOI: 10.1016/j.jedc.2013.07.005
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    Cited by:

    1. Gaballo, G., 2012. "Private Uncertainty and Multiplicity," Working papers 387, Banque de France.
    2. repec:spo:wpmain:info:hdl:2441/3bvs8clr5k9dqqcbq7j5ul2o65 is not listed on IDEAS
    3. repec:hal:spmain:info:hdl:2441/3bvs8clr5k9dqqcbq7j5ul2o65 is not listed on IDEAS
    4. Jean Barthélemy & Magali Marx, 2012. "Generalizing the Taylor Principle: New Comment," SciencePo Working papers Main hal-03461113, HAL.
    5. Minsung Kim & Minki Kim, 2014. "Group-Wise Herding Behavior in Financial Markets: An Agent-Based Modeling Approach," PLOS ONE, Public Library of Science, vol. 9(4), pages 1-7, April.
    6. Jean Barthélemy & Magali Marx, 2012. "Generalizing the Taylor Principle: New Comment," SciencePo Working papers hal-03461113, HAL.

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    More about this item

    Keywords

    Non-fundamental volatility; Perpetual learning; Comovements in expectations; Professional forecasters;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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