Fundamental Disagreement about Monetary Policy and the Term Structure of Interest Rates

Shuo Cao, Richard Crump, Stefano Eusepi and Emanuel Moench

No 934, Staff Reports from Federal Reserve Bank of New York

Abstract: Using a unique data set of individual professional forecasts, we document disagreement about the future path of monetary policy, particularly at longer horizons. The stark differences in short rate forecasts imply strong disagreement about the risk-return trade-off of longer-term bonds. Longer-horizon short rate disagreement co-moves with term premiums. We estimate an affine term structure model in which investors hold heterogeneous beliefs about the long-run level of rates. Our model fits Treasury yields and the short rate paths predicted by different groups of investors and thus matches the observed differences in expected return profiles. Investors who correctly anticipated the secular decline in rates became increasingly important for the marginal pricing of risk in the Treasury market. Accounting for heterogeneity in investment performance eliminates the downward trend in the term premium.

Keywords: disagreement; heterogeneous beliefs; noisy information; speculations; survey forecasts; yield curves; term premiums (search for similar items in EconPapers)
JEL-codes: D83 D84 E43 G10 G12 (search for similar items in EconPapers)
Pages: 33
Date: 2020-07-01
New Economics Papers: this item is included in nep-mac and nep-mon
Note: Revised August 2021.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr934.pdf Full text (application/pdf)
https://www.newyorkfed.org/research/staff_reports/sr934.html Summary (text/html)

Related works:
Working Paper: Fundamental Disagreement about Monetary Policy and the Term Structure of Interest Rates (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fednsr:88406

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Staff Reports from Federal Reserve Bank of New York Contact information at EDIRC.
Bibliographic data for series maintained by Gabriella Bucciarelli ().