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....

This paper revisits the issue of money growth versus the interest rate as the instrument of monetary policy. Using a dynamic stochastic general equilibrium framework, we examine the effects of alternative monetary policy rules on inflation persistence, the information content of monetary data,...

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...

Recent models of monetary policy have analyzed the desirability of di?erent optimal and ad hoc interest rules under the restrictive assumption that forecasts of the private sector and the central bank are homogenous. This paper studies the implications of heterogeneity in forecasting by the...

We study how the use of judgement or "add-factors" in macroeconomic 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 standard macroeconomic...

Recent models of monetary policy can have indeterminacy of equilibria, which is often viewed as a di±culty of these models. We consider the significance of indeterminacy using the learning approach to expectations formation. We employ expectational stability as a selection criterion for...

This paper shows that the optimal monetary policies recommended by New Keynesian models still imply a large amount of inflation risk. We calculate the term structure of inflation uncertainty in New Keynesian models when the monetary authority adopts the optimal policy. When the monetary policy...

Honkapohja and Mitra (2003) have analyzed the desirability of optimal and ad hoc interest rules in monetary policy when the forecasts of the private sector and the central bank are heterogenous but information is symmetric. Here we analyze the case of asymmetric information in which one party...

An economy exhibits structural heterogeneity when the forecasts of di?erent agents have different effects on the determination of aggregate variables. We study the important case of economies in which agents’ behavior depends on forecasts of aggregate variables and show how di?erent forms of...

This paper develops a monetary model with taxes to account for the apparently asymmetric and time-varying effects of energy shocks on output and hours worked in post-World War II U.S. data. In our model, the real effects of an energy shock are amplified when the monetary authority responds to...