Disagreement About Monetary Policy

63 Pages Posted: 24 Aug 2019 Last revised: 15 Aug 2022

See all articles by Karthik Sastry

Karthik Sastry

Princeton University - Department of Economics

Date Written: September 14, 2024

Abstract

This paper studies why central banks and markets hold different beliefs. I introduce a model that formalizes three mechanisms for disagreement: asymmetric information about fundamentals, different perceptions of the policy rule, and different confidence in public signals. I show how to separately identify these mechanisms using their predictions for beliefs about multiple variables. In US data, negative macroeconomic news predicts market over-estimation of interest rates and employment relative to realizations and Federal Reserve forecasts. The estimates imply that markets slightly misspecify the monetary rule and are significantly under-confident in public information. Central-bank private information and “information effects” are quantitatively negligible.

Keywords: monetary policy, disagreement, high-frequency identification

JEL Classification: E52, D84, E44, G14

Suggested Citation

Sastry, Karthik, Disagreement About Monetary Policy (September 14, 2024). Available at SSRN: https://ssrn.com/abstract=3421723 or http://dx.doi.org/10.2139/ssrn.3421723

Karthik Sastry (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

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