Seminar in Macroeconomics - Emanuel Mönch (Deutsche Bundesbank)
Fundamental Disagreement about Monetary Policy and the Term Structure of Interest Rates
Tuesday 2 April 2019 (12h15 - 13h30) - Extranef - 109
Forecasters disagree about the future path of monetary policy, particularly in the long-run. We propose an affine term structure model in which investors hold heterogeneous beliefs about the long-run level of rates. As they trade government bonds at equilibrium prices, they implicitly disagree about their risk-return tradeoff and engage in speculative trading. Our model fits U.S. Treasury yields and the short rate paths predicted by different groups of professional forecasters very well. We show that 1) a perceived slow-moving drift in the long-run level of the short rate is important in generating long-run disagreement about the policy rate; 2) almost half of the variation in term premiums is driven by disagreement about the policy rate; 3) disagreement affects term premiums through investors’ heterogeneous responses to symmetric signals as well as through endogenous wealth fluctuations.