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Working Paper 2007-008A

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"Monetary Policy, Judgment and Near-Rational Exuberance"
by James B. Bullard, George W. Evans, and Seppo Honkapohja

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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Category > Monetary Policy/Macroeconomics
Author > James B. Bullard