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
aggregate volatility despite unchanged monetary policy and time-invariant distribution of exogenous
shocks. In this context, a thigh inflation-targeting policy can lower expectational complementarity
preventing rational exuberance, although its effect is non-monotone.
