Discussion paper

DP15122 Fundamental Disagreement about Monetary Policy and the Term Structure of Interest Rates

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 U.S. Treasury
yields and the short rate paths predicted by different groups of professional forecasters
very well. About a third of the variation in term premiums is driven by short-rate
disagreement.

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Citation

Cao, S, R Crump and (eds) (2020), “DP15122 Fundamental Disagreement about Monetary Policy and the Term Structure of Interest Rates”, CEPR Press Discussion Paper No. 15122. https://cepr.org/publications/dp15122