Monetary Policy, Judgment, and Near-Rational Exuberance

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. I...

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Veröffentlicht in:	The American economic review 2008-06, Vol.98 (3), p.1163-1177
Hauptverfasser:	Bullard, James, Evans, George W., Honkapohja, Seppo
Format:	Artikel
Sprache:	eng
Schlagworte:	Agency theory Central banks Econometrics Economic expectations Economic forecasting Economic forecasting models Economic forecasts Equilibrium Forecasting Forecasting models Industrialized nations Judgement Judgment Keynesian theory Keynesianism Macroeconomic modeling Macroeconomics Mathematical economics Monetary economics Monetary policy Monetary theory Private sector Rational expectations Risk Shorter Papers Statistical forecasts Studies Variables Wage & price controls
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Beschreibung
Zusammenfassung:	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. (JEL E17, E31, E52)
ISSN:	0002-8282 1944-7981
DOI:	10.1257/aer.98.3.1163