We would like to thank Jarda Borovicka, James Choi, Charles Manski and seminar participants at the CESifo Venice Summer Institute Workshop on "Expectation Formation" for helpful comments and suggestions. The views expressed in this paper do not necessarily represent those of the Bank of Canada. Nagel thanks the Fama-Miller Center at the University of Chicago for research support. Klaus Adam thanks the Collaborative Research Center Transregio 224 sponsored by the German Research Foundation (DFG) for research support. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Bank of Canada staff working papers provide a forum for staff to publish work-in-progress research independently from the Bank's Governing Council. This research may support or challenge prevailing policy orthodoxy. Therefore, the views expressed in this paper are solely those of the authors and may differ from official Bank of Canada views. No responsibility for them should be attributed to the Bank.

Motivated by the observation that survey expectations of stock returns are inconsistent with rational return expectations under real-world probabilities, we investigate whether alternative expectations hypotheses entertained in the literature on asset pricing are consistent with the survey evidence. We empirically test (1) the notion that survey forecasts constitute rational but risk-neutral forecasts of future returns, and (2) the notion that survey forecasts are ambiguity averse/robust forecasts of future returns. We find that these alternative hypotheses are also strongly rejected by the data, albeit for different reasons. Hypothesis ( 1) is rejected because survey return forecasts are not in line with risk-free interest rates and because survey expected excess returns are predictable. Hypothesis ( 2) is rejected because agents are not always pessimistic about future returns, instead often displaying overly optimistic return expectations. We speculate as to what kind of expectations theories might be consistent with the available survey evidence.

We illustrate how financial market data are informative about the interactions between monetary and fiscal policy. Federal funds futures are private contracts that reflect investor’s expectations about future monetary policy decisions. By relating price movements of these contracts with President Trump’s tweets on monetary policy, we explore how financial market participants have perceived attempts by the President to influence monetary policy decisions. Our results indicate that market participants expected the Federal Reserve Bank to adjust monetary policy in the direction suggested by President Trump. (JEL codes: E44, E52, and E58)

How should independent central banks react if pressured by fiscal policymakers? We contrast the implications of two monetary frameworks: one, where the central bank follows a standard rule aiming exclusively at price stability against the other, where monetary policy additionally leans against fiscal influence. The latter rule improves economic outcomes by providing appropriate incentives to the fiscal authority. More importantly, the additional fiscal conditionality can enhance the credibility of the central bank to achieve price stability. We emphasise how the level and structure of government debt emerge as key factors affecting the credibility of monetary policy with fiscal conditionality.