Working Papers

Disagreement about inflation expectations has been studied extensively, however, little attention has been given to disagreement about inflation uncertainty. I use survey data on subjective beliefs about the U.S. inflation to form groups of forecasters with similar beliefs using a measure of the distance between probability distributions. Disagreement about inflation expectations and volatilities have declined over 1969-2023, whereas disagreement about inflation tail risks have increased following 1999. Incorporating tail risk disagreement into a term-structure model implies a much larger term-premium at times of high bond market uncertainty compared to a yields-only model.

Bailouts and Speculative Trade in Markets for Aggregate Disaster Risk Insurance

with Hanno Lustig, Monika Piazzesi and Martin Schneider

This paper examines how much speculative trade can be sustained in an economy when CRRA-utility agents have heterogeneous beliefs about aggregate consumption disasters but can walk away from their  financial commitments. We find that that little or no speculative trade can be sustained in an economy without pledgeable income when agents are reasonably risk averse. In autarchy, the disaster risk premia are set by the pessimists. However, even small bailout subsidies in the disaster state may be sufficient to sustain lots of speculative trade, in turn inducing low disaster risk premia.