Staff Reports
Fundamental Disagreement
Previous title: "Noisy Information and Fundamental Disagreement"
Number 655   December 2013
Revised April 2014
JEL classification: D83, D84, E37

Authors: Philippe Andrade, Richard K. Crump, Stefano Eusepi, and Emanuel Moench

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 term structure of disagreement differs markedly across variables: it 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 evaluate the ability of benchmark models of informational frictions to match these stylized facts. We show that these models require two additional ingredients. First, agents must decompose signals into temporary factors and low-frequency changes in fundamentals. Second, agents must take into account the dynamic interactions between variables when forming forecasts. The documented disagreement across forecasters is informative about how agents perceive structural macroeconomic relationships. In particular, the monetary policy rule perceived by professional forecasters features a high degree of interest-rate smoothing and time variation in the intercept.

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