Fundamental disagreement

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.

Evaluating the conditionality of judgmental forecasts

“…When they evaluate the SPF, they reject that the forecasts are informationally efficient, and attribute this deviation to informational rigidities. Andrade & Bihan (2013), Dovern, Fritsche, Loungani & Tamirisa (2015) and Andrade, Crump, Eusepi & Moench (2016) also explore the role of information frictions in professional forecasts. Typically, papers that perform forecast evaluation consider elements of a forecast one at a time, and this is also our approach.…”

Heterogeneous Beliefs and the Phillips Curve

“…3 Complications with using survey data often seem to come about because reported beliefs are highly heterogeneous and so hard to summarize using a single factor, such as an average. The cross-section dispersion of forecasts-known in the literature as 'disagreement', following the early work of Mankiw, Reis, and Wolfers (2003)-captures part of that heterogeneity (Andrade, Crump, Eusepi, and Moench, 2016;Rich and Tracy, 2010). 4 But disagreement does not tell the whole story.…”

Does maturity matter? The case of treasury futures volume

“…More recently, this line of literature has been growingly rich in emphasizing the term structure of disagreements. To date, the role of disagreement at different maturities has been discussed in the context of federal funds rates and GDP output (Andrade, Crump, Eusepi, & Moench, 2016), inflation (Andrade et al, 2016;Capistrán & Timmermann, 2009), bond yields (Crump, Eusepi, & Moench, 2018), and exchange rates (Cao, Huang, Liu, & MacDonald, 2018). Evident from these studies, disagreements in the short-and long-term segments of a market are economically different.…”

“…We contribute to the literature in several ways. First, we add to the line of research that examines horizon‐dependent disagreements (e.g., Andrade et al, ; Cao et al, ; Crump et al, ). Our study, to the best of our knowledge, is the first to differentiate between the information contents of short‐ and long‐term Treasury futures trading.…”