The Factor Structure of Disagreement

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. Keywords: Disagreement, Forecast Dispersion, Heterogeneous Expectations, Noisy Information, Dynamic Factor Model.