Disagreement about Monetary Policy

Karthik A. Sastry

American Economic Journal: Macroeconomics, 2026, vol. 18, issue 2, 486-522

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 overestimation 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 underconfident in public information. Central bank private information and "information effects" are quantitatively negligible.

JEL-codes: D82 D83 E24 E43 E52 E58 (search for similar items in EconPapers)
Date: 2026
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DOI: 10.1257/mac.20220266

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