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Monetary policy, judgment, and near-rational exuberance

Research output: Contribution to journalArticle

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Author(s)

James Bullard, George W Evans, Seppo Honkapohja

School/Research organisations

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.
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Original languageEnglish
Pages (from-to)1163-1177
Number of pages15
JournalAmerican Economic Review
Volume98
Issue number3
DOIs
Publication statusPublished - Jun 2008

    Research areas

  • CONSISTENT EXPECTATIONS, RULES

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ID: 3393391