Staff Reports
The Term Structure of Expectations
Number 992
November 2021

JEL classification: D83, D84, E32, E43, E44, G12

Authors: Richard K. Crump, Stefano Eusepi, Emanuel Moench, and Bruce Preston

Economic theory predicts that intertemporal decisions depend critically on expectations about future outcomes. Using the universe of professional survey forecasts for the United States, we document the behavior of the entire term structure of expectations for output growth, inflation, and the policy rate. We show that a simple unobserved components model of the trend and cycle explains the joint behavior of both consensus measures of expectations and the observed disagreement among individual forecasters. Importantly, univariate models of each variable are outperformed by a multivariate model of the joint dynamics of these three variables, particularly for nominal interest rates. Consistent with the data, the model predicts a link between revisions in long-run expectations to short-term forecast errors. In structural models, learning about the long run has important empirical and theoretical implications for monetary and fiscal policy.

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AUTHOR DISCLOSURE STATEMENT(S)
Richard Crump
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “The Term Structure of Expectations,” joint with Stefano Eusepi, Emanuel Moench, and Bruce Preston. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Stefano Eusepi
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “The Term Structure of Expectations,” joint with Richard Crump, Emanuel Moench, and Bruce Preston. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Emanuel Moench
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “The Term Structure of Expectations,” joint with Richard Crump, Stefano Eusepi, and Bruce Preston. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Bruce Preston
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “The Term Structure of Expectations,” joint with Richard Crump, Stefano Eusepi, and Emanuel Moench. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
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