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Inflation expectations and firms’ decisions: new causal evidence

Author

Listed:
  • Olivier Coibion

    (University of Texas, Austin)

  • Yuriy Gorodnichenko

    (University of California, Berkeley)

  • Tiziano Ropele

    (Bank of Italy)

Abstract

We use a unique design feature of a survey of Italian firms to study the causal effect of inflation expectations on firms’ economic decisions. In the survey, a randomly chosen subset of firms is repeatedly treated with information about recent inflation whereas other firms are not. This information treatment generates exogenous variation in inflation expectations. We find that higher inflation expectations on the part of firms leads them to raise their prices, increase their utilization of credit, and reduce their employment. However, when policy rates are constrained by the effective lower bound, demand effects are stronger, leading firms to raise their prices more and no longer reduce their employment.

Suggested Citation

  • Olivier Coibion & Yuriy Gorodnichenko & Tiziano Ropele, 2019. "Inflation expectations and firms’ decisions: new causal evidence," Temi di discussione (Economic working papers) 1219, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1219_19
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    More about this item

    Keywords

    inflation expectations; surveys; inattention;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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