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

Shuo Cao, Richard Crump and ,
Authors registered in the RePEc Author Service: Emanuel Moench

No 15122, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Using a unique dataset 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; Speculation; Survey forecasts; Yield curve; Term premium (search for similar items in EconPapers)
JEL-codes: D83 D84 E43 G10 G12 (search for similar items in EconPapers)
Date: 2020-08
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Working Paper: Fundamental Disagreement about Monetary Policy and the Term Structure of Interest Rates (2020)
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