Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5098672 | Journal of Economic Dynamics and Control | 2013 | 16 Pages |
Abstract
In an otherwise unique-equilibrium model, agents are segmented into a few informational islands according to the signal they receive about others' expectations. Even if agents perfectly observe fundamentals, rational-exuberance equilibria (REX) can arise as they put weight on expectational signals to refine their forecasts. Constant-gain adaptive learning can trigger jumps between the equilibrium where only fundamentals are weighted and a REX. This determines regime switching in macro volatility despite unchanged monetary policy and time-invariant distribution of exogenous shocks. In this context, a tight inflation-targeting policy can lower expectational complementarity preventing rational exuberance, although its effect is non-monotone.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Gaetano Gaballo,