By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.
This paper studies why central banks and markets hold different beliefs. I introduce a
model that formalizes three mechanisms for disagreement: asymmetric information about
fundamentals, different perceptions of the policy rule, and different confidence in public
signals. I show how to separately identify these mechanisms using their predictions for
beliefs about multiple variables. In US data, negative macroeconomic news predicts market
over-estimation of interest rates and employment relative to realizations and Federal
Reserve forecasts. The estimates imply that markets slightly misspecify the monetary rule
and are significantly under-confident in public information. Central-bank private information
and “information effects” are quantitatively negligible.
