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The Factor Structure of Disagreement

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Abstract

We estimate a Bayesian three-dimensional dynamic factor model on the individual forecasts in the Survey of Professional Forecasters. The factors extract the most important dimensions along which disagreement comoves across variables. We interpret our results through a general semi-structural dispersed information model. The two most important factors in the data describe disagreement about aggregate supply and demand, respectively. Up until the Great Moderation, supply disagreement was dominant, while in recent decades and particularly during the Great Recession, demand disagreement was most important. By contrast, disagreement about monetary policy shocks seems to play a minor role in the data. Our findings can serve to discipline structural models of heterogeneous expectations.

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  • Edward P. Herbst & Fabian Winkler, 2021. "The Factor Structure of Disagreement," Finance and Economics Discussion Series 2021-046, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2021-46
    DOI: 10.17016/FEDS.2021.046
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    Cited by:

    1. Clodomiro Ferreira & Stefano Pica, 2023. "Household Perceived Sources of Business Cycle Fluctuations: a Tale of Supply and Demand," Working Papers 287, Red Nacional de Investigadores en Economía (RedNIE).

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    More about this item

    Keywords

    Disagreement; Forecast Dispersion; Heterogeneous Expectations; Noisy Information; Dynamic Factor Model;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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