Fundamental Disagreement

52 Pages Posted: 11 Jan 2014 Last revised: 7 Dec 2014

See all articles by Philippe Andrade

Philippe Andrade

Federal Reserve Banks - Federal Reserve Bank of Boston

Richard K. Crump

Federal Reserve Banks - Federal Reserve Bank of New York

Stefano Eusepi

University of Texas at Austin

Emanuel Moench

Deutsche Bundesbank; Goethe University Frankfurt - Department of Money and Macroeconomics

Multiple version iconThere are 2 versions of this paper

Date Written: November 12, 2014

Abstract

We use the term structure of disagreement of professional forecasters to document a novel set of facts: (1) forecasters disagree at all horizons, including the long run; (2) the term structure of disagreement differs markedly across variables: it is downward sloping for real output growth, relatively flat for inflation, and upward sloping for the federal funds rate; (3) disagreement is time-varying at all horizons, including the long run. These new facts present a challenge to benchmark models of expectation formation based on informational frictions. We show that these models require two additional ingredients to match the entire term structure of disagreement: First, agents must disentangle low-frequency shifts in the fundamentals of the economy from short-term fluctuations. Second, agents must take into account the dynamic interactions between variables when forming forecasts. While models enriched with these features capture the observed term structure of disagreement irrespective of the source of the informational friction, they fall short at explaining the time variance of disagreement at medium- and long-term horizons. We also use the term structure of disagreement to analyze the monetary policy rule perceived by professional forecasters and show that it features a high degree of interest-rate smoothing and time variation in the intercept.

Keywords: expectations, survey forecasts, imperfect information, term structure of disagreement

JEL Classification: D83, D84, E37

Suggested Citation

Andrade, Philippe and Crump, Richard K. and Eusepi, Stefano and Moench, Emanuel, Fundamental Disagreement (November 12, 2014). FRB of New York Staff Report No. 655. Available at SSRN: https://ssrn.com/abstract=2377025 or http://dx.doi.org/10.2139/ssrn.2377025

Philippe Andrade

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

Richard K. Crump (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Stefano Eusepi

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

Emanuel Moench

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany
+49 69 95662312 (Phone)

HOME PAGE: http://https://www.bundesbank.de/en/emanuel-moench

Goethe University Frankfurt - Department of Money and Macroeconomics ( email )

Germany

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