The Term Structure of Uncertainty: New Evidence from Survey Expectations

Abstract

We construct measures of individual forecasters' subjective uncertainty at horizons ranging from one to five years, incorporating a rich information set from the European Central Bank's Survey of Professional Forecasters. We find that the uncertainty curve is more linear than the disagreement curve --- uncertainty at the one-year and two-year horizons can almost perfectly predict uncertainty at the five-year horizon, but not so for disagreement. We document substantial heterogeneity across forecasters in both the level and the term structure of uncertainty, and show that the difference between long-run and short-run uncertainty is procyclical. We develop a signal extraction model that features (i) Kalman filter updating, (ii) time-varying uncertainty and (iii) multi-step ahead forecasting. Our model implies that the heterogeneous patterns of uncertainty over different time horizons depend on forecaster's perceived persistence and volatility of the signal and the noise.