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Rational exuberance booms

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  • Gene Ambrocio

    (Bank of Finland)

Abstract

I provide a theory of information production and learning that can help account for both the excessive optimism that fueled booms preceding crises and the slow recoveries that followed. In my theory, persistence and the size of expectation errors depend on information production about changes in aggregate fundamentals. In turn information production, via credit screening, tends to fall during both very good and very bad times. The former gives rise to episodes of rational exuberance in which optimistic beliefs may sustain booms even as fundamentals decline. I also document evidence from survey forecasts consistent with the model predictions. (Copyright: Elsevier)

Suggested Citation

  • Gene Ambrocio, 2020. "Rational exuberance booms," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 263-282, January.
    • Handle: RePEc:red:issued:18-163
    DOI: 10.1016/j.red.2019.07.002
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    More about this item

    Keywords

    Business cycles; Credit screening; Information choice; Social learning;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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