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Forecast bias across horizons: Inflation expectations and the Treasury yields
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DOI：10.1016/j.jfineco.2026.104327.png)
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Abstract
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I show that the overreaction of the long-term yield forecasts to yield news, evidenced in recent studies, results directly from the overreaction of long-horizon inflation forecasts to inflation news. Motivated by this finding, I study how agents form inflation expectations across forecast horizons. Short-horizon survey forecasts underreact, while long-horizon forecasts overreact to inflation news. To reconcile this behavior, I implement a long-run bias, building on the widely shared intuition that agents conflate transitory with permanent shocks, within a realistic trend-gap inflation model. I embed this bias within a yield curve model. The long-horizon inflation expectations overreaction translates into a long-term yields’ overreaction, generating excess yield sensitivity to news. The model implies a long-term bond risk premium substantially less volatile and cyclical than that implied by predictive regressions or estimates imposing full-information rational expectations.
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