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A Model of Near-Rational Exuberance

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  • Evans, George
  • Bullard, James
  • Honkapohja, Seppo

Abstract

We study how the use of judgement or add-factors in forecasting may disturb the set of equilibrium outcomes when agents learn using recursive methods. We isolate conditions under which new phenomena, which we call exuberance equilibria, can exist in a standard self-referential environment. Local indeterminacy is not a requirement for existence. We construct a simple asset pricing example and find that exuberance equilibria, when they exist, can be extremely volatile relative to fundamental equilibria.

Suggested Citation

  • Evans, George & Bullard, James & Honkapohja, Seppo, 2009. "A Model of Near-Rational Exuberance," SIRE Discussion Papers 2009-11, Scottish Institute for Research in Economics (SIRE).
    • Handle: RePEc:edn:sirdps:122
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    File URL: http://hdl.handle.net/10943/122
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    Cited by:

    1. 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.
    2. Roger E.A. Farmer & Carine Nourry & Alain Venditti, 2012. "The Inefficient Markets Hypothesis: Why Financial Markets Do Not Work Well in the Real World," NBER Working Papers 18647, National Bureau of Economic Research, Inc.
    3. Evans, George W. & Hommes, Cars & McGough, Bruce & Salle, Isabelle, 2022. "Are long-horizon expectations (de-)stabilizing? Theory and experiments," Journal of Monetary Economics, Elsevier, vol. 132(C), pages 44-63.
    4. Wigniolle, B., 2014. "Optimism, pessimism and financial bubbles," Journal of Economic Dynamics and Control, Elsevier, vol. 41(C), pages 188-208.
    5. Christian Hellwig & Laura Veldkamp, 2009. "Knowing What Others Know: Coordination Motives in Information Acquisition," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 76(1), pages 223-251.
    6. Boucekkine, Raouf & Kazuo, Nishimura & Venditti, Alain, 2017. "Introduction to international financial markets and banking systems crises," Journal of Mathematical Economics, Elsevier, vol. 68(C), pages 87-91.
    7. Hommes, Cars & Zhu, Mei, 2014. "Behavioral learning equilibria," Journal of Economic Theory, Elsevier, vol. 150(C), pages 778-814.
    8. Cars Hommes, 2017. "From Self-Fulfilling Mistakes to Behavioral Learning Equilibria," Studies in Economic Theory, in: Kazuo Nishimura & Alain Venditti & Nicholas C. Yannelis (ed.), Sunspots and Non-Linear Dynamics, chapter 0, pages 97-123, Springer.
    9. Elias, Christopher J., 2016. "A heterogeneous agent exchange rate model with speculators and non-speculators," Journal of Macroeconomics, Elsevier, vol. 49(C), pages 203-223.
    10. Georges, Christophre, 2008. "Staggered updating in an artificial financial market," Journal of Economic Dynamics and Control, Elsevier, vol. 32(9), pages 2809-2825, September.
    11. Volha Audzei, 2015. "Information Acquisition and Excessive Risk: Impact of Policy Rate and Market Volatility," CERGE-EI Working Papers wp536, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    12. Murray, James, 2011. "Learning and judgment shocks in U.S. business cycles," MPRA Paper 29257, University Library of Munich, Germany.
    13. Chevillon, Guillaume & Mavroeidis, Sophocles, 2018. "Perpetual learning and apparent long memory," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 343-365.
    14. Volha Audzei, 2012. "Efficiency of Central Bank Policy During the Crisis : Role of Expectations in Reinforcing Hoarding Behavior," CERGE-EI Working Papers wp477, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    15. Gene Ambrocio, 2020. "Rational exuberance booms," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 263-282, January.
    16. Elias, Christopher J., 2016. "Asset pricing with expectation shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 65(C), pages 68-82.
    17. Kris De Jaegher, 2016. "Endogenous thresholds and assurance networks in collective action," Rationality and Society, , vol. 28(2), pages 202-252, May.

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    More about this item

    Keywords

    Learning; expectations; excess volatility; bounded rationality;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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