A Model of Near-Rational Exuberance

40 Pages Posted: 7 Mar 2007

See all articles by James Bullard

James Bullard

Federal Reserve Banks - Federal Reserve Bank of St. Louis

George W. Evans

University of Oregon - Department of Economics; University of St. Andrews - School of Economics and Finance

Seppo Honkapohja

Centre for Economic Policy Research (CEPR); Aalto University School of Business; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Aalto University - School of Business

Date Written: January 1, 2008

Abstract

We study how the use of judgment or "add-factors" in forecasting may disturb the set of equilibrium outcomes when agents learn 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: Learning, expectations, excess volatility, bounded rationality

JEL Classification: E520, E610

Suggested Citation

Bullard, James and Evans, George W. and Honkapohja, Seppo and Honkapohja, Seppo, A Model of Near-Rational Exuberance (January 1, 2008). Available at SSRN: https://ssrn.com/abstract=967502 or http://dx.doi.org/10.2139/ssrn.967502

James Bullard (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

P.O. Box 442
411 Locust Street
St. Louis, MO 63166
United States
314-444-8576 (Phone)

George W. Evans

University of Oregon - Department of Economics ( email )

1285 University of Oregon
Eugene, OR 97403
United States
541-346-4662 (Phone)
541-346-1243 (Fax)

University of St. Andrews - School of Economics and Finance ( email )

The Scores, Castlecliff
St. Andrews, Fife KY16 8RD
United Kingdom
44-1334-462435 (Phone)

HOME PAGE: http://www.st-andrews.ac.uk/economics/staff/pages.g.evans.shtml

Seppo Honkapohja

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Aalto University School of Business ( email )

, PO Box 21210
Aalto FI-00076
Finland

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Aalto University - School of Business

Finland

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
44
Abstract Views
610
PlumX Metrics