Monetary Policy, Judgment, and Near-Rational Exuberance
James Bullard, George W. Evans, Seppo Honkapohja
American Economic Review · 2008 · Volume 98 · Issue 3
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.
Keywords
General Aggregative Models: Forecasting and Simulation, Price Level, Inflation, Deflation, Monetary Policy
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