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Disagreement about Monetary Policy

Author

Listed:
  • Karthik A. Sastry

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.

Suggested Citation

  • Karthik A. Sastry, 2026. "Disagreement about Monetary Policy," American Economic Journal: Macroeconomics, American Economic Association, vol. 18(2), pages 486-522, April.
    • Handle: RePEc:aea:aejmac:v:18:y:2026:i:2:p:486-522
    DOI: 10.1257/mac.20220266
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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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