Fundamental disagreement

Philippe Andrade, Richard Crump, S. Eusepi and Emanuel Moench

Working papers from Banque de France

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. (search for similar items in EconPapers)
JEL-codes: D83 D84 E37 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2014
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (34)

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Related works:
Journal Article: Fundamental disagreement (2016)
Working Paper: Fundamental disagreement (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:524

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