Macroeconomic Dynamics



James Bullarda1, George W. Evansa2 c1 and Seppo Honkapohjaa3

a1 Federal Reserve Bank of St. Louis

a2 University of Oregon, and University of St. Andrews

a3 Bank of Finland


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.


  • Learning;
  • Expectations;
  • Excess Volatility;
  • Bounded Rationality


c1 Address correspondence to: George W. Evans, Department of Economics, University of Oregon, Eugene, OR 97403-1285, USA; e-mail:


An early version of this paper was presented at the ECB Conference “Monetary Policy and Imperfect Knowledge,” Würzburg, Germany. We thank Martin Ellison, Roger Farmer, Petra Geraats, Eran Guse, Sharon Kozicki, Albert Marcet, Danny Quah, Bob Tetlow, the referees of this journal, and the participants at the ECB conference as well as participants at many other conferences and seminars for their comments. Any views expressed are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of St. Louis, of the Federal Reserve System, or of the Bank of Finland. Support for G.W.E. from National Science Foundation Grant No. SES-0617859 is gratefully acknowledged. Financial support for S.H. from ESRC grant RES-000-23-1152 is gratefully acknowledged.