Rational Exuberance Booms

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Title: Rational Exuberance Booms
Author: Ambrocio, Gene
Series: Review of Economic Dynamics
Series volume: 35
Series number: January
Year of publication: 2020
Publication date: 2.1.2020
Published in: Published in Bank of Finland DP 24/2015 http://urn.fi/URN:NBN:fi:bof-201511261453
DOI: https://doi.org/10.1016/j.red.2019.07.002
Page range: 263-282
Keywords: informaatio; odotukset; suhdannevaihtelut; oppiminen; luotot
JEL: D83; E32; E44; G01; G14
Other keywords: business cycles; credit screening; information choice; social learning
Abstract: I provide a theory of information production and learning that can help account for both the excessive optimism that fueled booms preceding crises and the slow recoveries that followed. In my theory, persistence and the size of expectation errors depend on information production about changes in aggregate fundamentals. In turn information production, via credit screening, tends to fall during both very good and very bad times. The former gives rise to episodes of rational exuberance in which optimistic beliefs may sustain booms even as fundamentals decline. I also document evidence from survey forecasts consistent with the model predictions.

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