Hostname: page-component-78c5997874-m6dg7 Total loading time: 0 Render date: 2024-11-13T09:24:24.733Z Has data issue: false hasContentIssue false
  • English
  • Français

A MODEL OF NEAR-RATIONAL EXUBERANCE

Published online by Cambridge University Press:  09 March 2010

James Bullard ,
George W. Evans  and
Seppo Honkapohja
James Bullard
Affiliation:
Federal Reserve Bank of St. Louis
George W. Evans*
Affiliation:
University of Oregon, and University of St. Andrews
Seppo Honkapohja
Affiliation:
Bank of Finland
*
Address correspondence to: George W. Evans, Department of Economics, University of Oregon, Eugene, OR 97403-1285, USA; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

We study how the use of judgment or “add-factors” in forecasting may disturb the set of equilibrium outcomes when agents learn by 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.

Keywords

LearningExpectationsExcess VolatilityBounded Rationality
Type
Articles
Information
Macroeconomic Dynamics , Volume 14 , Issue 2 , April 2010 , pp. 166 - 188
Copyright
Copyright © Cambridge University Press 2010

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Akerlof, G.A. and Yellen, J.L. (1985) A near-rational model of the business cycle with wage and price inertia. Quarterly Journal of Economics 100, 823–838.CrossRefGoogle Scholar
Ball, L. (2000) Near-Rationality and Inflation in Two Monetary Regimes. NBER Working paper #7988.CrossRefGoogle Scholar
Benhabib, J. and Farmer, R.E.A. (1999) Indeterminacy and sunspots in macroeconomics. In Taylor, J.B. and Woodford, M. (eds.). Handbook of Macroeconomics, Volume 1A, Chap. 6, pp. 387–448. Amsterdam: Elsevier.CrossRefGoogle Scholar
Branch, W.A. and McGough, B. (2005) Consistent expectations and misspecification in stochastic non-linear economies. Journal of Economic Dynamics and Control 29, 659–676.CrossRefGoogle Scholar
Brock, W.A. and Hommes, C.H. (1998) Heterogeneous beliefs and routes to chaos in a simple asset pricing model. Journal of Economic Dynamics and Control 22, 1235–1274.CrossRefGoogle Scholar
Brockwell, P.J. and Davis, R.A. (1991) Time Series: Theory and Methods, 2nd ed.New York: Springer-Verlag.CrossRefGoogle Scholar
Bullard, J. G. Evans, and Honkapohja, S. (2008) Monetary policy, judgment and near-rational exuberance. American Economic Review 98, 1163–1177.CrossRefGoogle Scholar
Caballero, R.J. (1995) Near-rationality, heterogeneity, and aggregate consumption. Journal of Money, Credit, and Banking 27, 29–48.CrossRefGoogle Scholar
Chiappori, P.A. and Guesnerie, R. (1991) Sunspot equilibria in sequential market models. In Hildenbrand, W. and Sonnenschein, H. (eds.), Handbook of Mathematical Economics, Volume 4A, Chapter 32, pp.1683–1762. Amsterdam: Elsevier.CrossRefGoogle Scholar
Evans, G.W. and Honkapohja, S. (1994) Learning, convergence and stability with multiple rational expectations equilibria. European Economic Review 38, 1071–1098.CrossRefGoogle Scholar
Evans, G.W. and Honkapohja, S. (1998) Economic dynamics with learning: New stability results. Review of Economic Studies 65, 23–44.CrossRefGoogle Scholar
Evans, G.W. and Honkapohja, S. (1999) Learning dynamics. In Taylor, J. B. and Woodford, M. (eds.). Handbook of Macroeconomics, Volume 1A, Chapter 7, pp.449–542. Amsterdam: Elsevier.CrossRefGoogle Scholar
Evans, G.W. and Honkapohja, S. (2001) Learning and Expectations in Macroeconomics. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
Granger, C.W.J and Newbold, P. (1986) Forecasting Economic Time Series, 2nd ed.Orlando, FL: Academic Press.Google Scholar
Hamilton, J.D. (1994) Time Series Analysis. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
Harvey, A.C. (1981) Time Series Models. Oxford, UK: Philip Allan.Google Scholar
Hommes, C. and Sorger, G. (1998) Consistent expectations equilibria. Macroeconomic Dynamics 2, 287–321.CrossRefGoogle Scholar
Hong, H. J. Scheinkman, and Xiong, W. (2006) Asset float and speculative bubbles. Journal of Finance 61, 1073–1117.CrossRefGoogle Scholar
Jansson, P. and Vredin, A. (2001) Forecast-Based Monetary Policy in Sweden 1992–1998: A View from Within. Working paper 120, Sveriges Riksbank, Stockholm.Google Scholar
Lagunoff, R. and Schreft, S.L. (1999) Financial fragility with rational and irrational exuberance. Journal of Money, Credit and Banking 31, 531–560.CrossRefGoogle Scholar
Lettau, M. and Uhlig, H. (2002) The Sharpe ratio and preferences: A parametric approach. Macroeconomic Dynamics 6, 242–265.CrossRefGoogle Scholar
Ljung, L. and Soderstrom, T. (1983) Theory and Practice of Recursive Identification. Cambridge, MA: MIT Press.Google Scholar
Marcet, A. and Sargent, T.J. (1989) Convergence of least squares learning mechanisms in self-referential linear stochastic models. Journal of Economic Theory 48, 337–368.CrossRefGoogle Scholar
Marcet, A. and Sargent, T.J. (1995) Speed of convergence of recursive least squares: Learning with autoregressive moving-average perceptions. In Kirman, A. and Salmon, M. (eds.), Learning and Rationality in Economics, Chapter 6, pp. 179–215. Oxford, UK: Basil Blackwell.Google Scholar
Marimon, R. (1997) Learning from learning in economics. In Kreps, D.M. and Wallis, K.F. (eds.), Advances in Economics and Econometrics: Theory and applications, Volume I, Chapter 9, pp. 278–315. Cambridge, UK: Cambridge University Press.CrossRefGoogle Scholar
Ofek, E. and Richardson, M. (2003) Dotcom mania: The rise and fall of internet stock prices. Journal of Finance 58, 1113–1137.CrossRefGoogle Scholar
Reifschneider, D.L., Stockton, D.J., and Wilcox, D.W. (1997) Econometric models and the monetary policy process. Carnegie Rochester Conference Series on Public Policy 47, 1–37.CrossRefGoogle Scholar
Sargent, T. (1991) Equilibrium with signal extraction from endogenous variables. Journal of Economic Dynamics and Control 15, 245–273.CrossRefGoogle Scholar
Sargent, T.J. (1993) Bounded Rationality in Macroeconomics. Oxford, UK: Oxford University Press.CrossRefGoogle Scholar
Sargent, T.J. (1999) The Conquest of American Inflation. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
Shiller, R.J. (1981) Do stock prices move too much to be justified by subsequent changes in dividends? American Economic Review 71, 421–436.Google Scholar
Svensson, L.E.O. (2003) What is wrong with Taylor rules? Using judgment in monetary policy through targeting rules. Journal of Economic Literature 41, 426–477.CrossRefGoogle Scholar
Svensson, L.E.O. (2005) Monetary policy with judgment: Forecast targeting. International Journal of Central Banking 1, 1–54.Google Scholar
Svensson, L.E.O. and Tetlow, R.J. (2005) Optimal policy projections. International Journal of Central Banking 1, 177–207.Google Scholar