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Noisy information and fundamental disagreement

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  • Andrade, Philippe
  • Crump, Richard K.

    ()
    (Federal Reserve Bank of New York)

  • Eusepi, Stefano

    (Federal Reserve Bank of New York)

  • Moench, Emanuel

    (Federal Reserve Bank of New York)

Abstract

We study the term structure of disagreement of professional forecasters for key macroeconomic variables. We document a novel set of facts: 1) forecasters disagree at all horizons, including the very long run; 2) the shape of the term structure of disagreement differs markedly across variables: the term structure is downward-sloping for real output growth, relatively flat for CPI inflation, and upward-sloping for the federal funds rate; 3) disagreement is time varying at all horizons, including the very long run. We suggest a model with noisy information and shifting long-run beliefs that is consistent with these stylized facts. Notably, our model does not rely on the heterogeneity of prior beliefs, bounded rationality, or differences in the precision of signals across agents.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 655.

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Length: 36 pages
Date of creation: 01 Dec 2013
Date of revision:
Handle: RePEc:fip:fednsr:655

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Keywords: expectations; survey forecasts; imperfect information; term structure of disagreement;

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References

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  1. Kristoffer Nimark, 2009. "Speculative dynamics in the term structure of interest rates," Economics Working Papers 1194, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 2012.
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  15. Patton, Andrew J. & Timmermann, Allan, 2010. "Why do forecasters disagree? Lessons from the term structure of cross-sectional dispersion," Journal of Monetary Economics, Elsevier, vol. 57(7), pages 803-820, October.
  16. Mark W. Watson & James H. Stock, 2004. "Combination forecasts of output growth in a seven-country data set," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 23(6), pages 405-430.
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