Disagreement About Monetary Policy
63 Pages Posted: 24 Aug 2019 Last revised: 15 Aug 2022
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: Suggested Citation