IDEAS home Printed from https://ideas.repec.org/p/bdi/wptemi/td_1219_19.html
   My bibliography  Save this paper

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
    as

    Download full text from publisher

    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2019/2019-1219/en_tema_1219.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Hibiki Ichiue & Shusaku Nishiguchi, 2015. "Inflation Expectations And Consumer Spending At The Zero Bound: Micro Evidence," Economic Inquiry, Western Economic Association International, vol. 53(2), pages 1086-1107, April.
    2. Boneva, Lena & CLoyne, James & Weale, Martin & Wieladek, Tomasz, 2016. "Firms’ expectations and price-setting: evidence from micro data," Discussion Papers 48, Monetary Policy Committee Unit, Bank of England.
    3. Laura Bartiloro & Marco Bottone & Alfonso Rosolia, 2017. "What does the heterogeneity of the inflation expectations of Italian firms tell us?," Questioni di Economia e Finanza (Occasional Papers) 414, Bank of Italy, Economic Research and International Relations Area.
    4. Olivier Coibion & Yuriy Gorodnichenko & Saten Kumar, 2018. "How Do Firms Form Their Expectations? New Survey Evidence," American Economic Review, American Economic Association, vol. 108(9), pages 2671-2713, September.
    5. Albonico, Alice & Calès, Ludovic & Cardani, Roberta & Croitorov, Olga & Ferroni, Filippo & Giovannini, Massimo & Hohberger, Stefan & Pataracchia, Beatrice & Pericoli, Filippo & Raciborski, Rafal & Rat, 2017. "The Global Multi-Country Model (GM): an Estimated DSGE Model for the Euro Area Countries," Working Papers 2017-10, Joint Research Centre, European Commission (Ispra site).
    6. Pedro Bordalo & Nicola Gennaioli & Yueran Ma & Andrei Shleifer, 2020. "Overreaction in Macroeconomic Expectations," American Economic Review, American Economic Association, vol. 110(9), pages 2748-2782, September.
    7. Olivier Coibion & Yuriy Gorodnichenko, 2012. "What Can Survey Forecasts Tell Us about Information Rigidities?," Journal of Political Economy, University of Chicago Press, vol. 120(1), pages 116-159.
    8. Coibion, Olivier & Gorodnichenko, Yuriy & Kumar, Saten & Pedemonte, Mathieu, 2020. "Inflation expectations as a policy tool?," Journal of International Economics, Elsevier, vol. 124(C).
    9. Guido Tabellini, 2005. "Culture and Institutions: Economic Development in the Regions of Europe," CESifo Working Paper Series 1492, CESifo.
    10. Saten Kumar & Hassan Afrouzi & Olivier Coibion & Yuriy Gorodnichenko, 2015. "Inflation Targeting Does Not Anchor Inflation Expectations: Evidence from Firms in New Zealand," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 46(2 (Fall)), pages 151-225.
    11. Olivier Coibion & Yuriy Gorodnichenko & Saten Kumar & Jane Ryngaert, 2018. "Do You Know That I Know That You Know...? Higher-Order Beliefs in Survey Data," NBER Working Papers 24987, National Bureau of Economic Research, Inc.
    12. Bartosz Mackowiak & Mirko Wiederholt, 2019. "Optimal Sticky Prices Under Rational Inattention," Credit and Capital Markets, Credit and Capital Markets, vol. 52(4), pages 573-617.
    13. Olivier Coibion & Yuriy Gorodnichenko, 2015. "Information Rigidity and the Expectations Formation Process: A Simple Framework and New Facts," American Economic Review, American Economic Association, vol. 105(8), pages 2644-2678, August.
    14. Johannes F. Wieland, 2019. "Are Negative Supply Shocks Expansionary at the Zero Lower Bound?," Journal of Political Economy, University of Chicago Press, vol. 127(3), pages 973-1007.
    15. Guido Tabellini, 2010. "Culture and Institutions: Economic Development in the Regions of Europe," Journal of the European Economic Association, European Economic Association, vol. 8(4), pages 677-716, June.
    16. Rüdiger Bachmann & Tim O. Berg & Eric R. Sims, 2015. "Inflation Expectations and Readiness to Spend: Cross-Sectional Evidence," American Economic Journal: Economic Policy, American Economic Association, vol. 7(1), pages 1-35, February.
    17. Cristina Conflitti & Roberta Zizza, 2018. "What’s behind firms’ inflation forecasts?," Questioni di Economia e Finanza (Occasional Papers) 465, Bank of Italy, Economic Research and International Relations Area.
    18. Francesco D’Acunto & Daniel Hoang & Michael Weber, 2017. "The Effect of Unconventional Fiscal Policy on Consumption Expenditure," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 15(01), pages 09-11, April.
    19. Carvalho, Carlos & Nechio, Fernanda, 2014. "Do people understand monetary policy?," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 108-123.
    20. Olivier Coibion & Yuriy Gorodnichenko & Michael Weber, 2019. "Monetary Policy Communications and their Effects on Household Inflation Expectations," NBER Working Papers 25482, National Bureau of Economic Research, Inc.
    21. Adriana Grasso & Tiziano Ropele, 2018. "Firms’ inflation expectations and investment plans," Temi di discussione (Economic working papers) 1203, Bank of Italy, Economic Research and International Relations Area.
    22. Lena Draeger & Michael J. Lamla, 2015. "Disagreement à la Taylor: Evidence from Survey Microdata," KOF Working papers 15-380, KOF Swiss Economic Institute, ETH Zurich.
    23. Rosen Valchev & Nicolas Vincent & Cosmin Ilut, 2014. "Paralyzed by Fear: Rigid and Discrete Pricing under Demand Uncertainty," 2014 Meeting Papers 716, Society for Economic Dynamics.
    24. Carola Binder & Alex Rodrigue, 2018. "Household Informedness and Long‐Run Inflation Expectations: Experimental Evidence," Southern Economic Journal, John Wiley & Sons, vol. 85(2), pages 580-598, October.
    25. John C. Driscoll & Aart C. Kraay, 1998. "Consistent Covariance Matrix Estimation With Spatially Dependent Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 549-560, November.
    26. Ruediger Bachmann & Steffen Elstner, 2013. "Firms' Optimism and Pessimism," CESifo Working Paper Series 4176, CESifo.
    27. Lena Dräger & Giang Nghiem, 2016. "Are Consumers’ Spending Decisions in Line With an Euler Equation?," Working Papers 1802, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 26 Jan 2018.
    28. Bachmann, Rüdiger & Elstner, Steffen, 2015. "Firm optimism and pessimism," European Economic Review, Elsevier, vol. 79(C), pages 297-325.
    29. Marco Bottone & Alfonso Rosolia, 2019. "Monetary policy, firms’ inflation expectations and prices: causal evidence from firm-level data," Temi di discussione (Economic working papers) 1218, Bank of Italy, Economic Research and International Relations Area.
    30. Olivier Coibion & Yuriy Gorodnichenko & Michael Weber & Michael Weber, 2019. "Monetary Policy Communications and their Effects on Household Inflation Expectations," CESifo Working Paper Series 7464, CESifo.
    31. Hans-Ueli Hunziker & Christian Raggi & Rina Rosenblatt-Wisch & Attilio Zanetti, 2018. "The impact of guidance, short-term dynamics and individual characteristics on firms' long-term inflation expectations," Working Papers 2018-18, Swiss National Bank.
    32. Francesco D'Acunto & Daniel Hoang & Michael Weber & Michael Weber, 2016. "The Effect of Unconventional Fiscal Policy on Consumption Expenditure," CESifo Working Paper Series 6059, CESifo.
    Full references (including those not matched with items on IDEAS)

    Citations

    RePEc Biblio mentions

    As found on the RePEc Biblio, the curated bibliography for Economics:
    1. > Macroeconomics > Monetary Theory

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Coibion, Olivier & Georgarakos, Dimitris & Gorodnichenko, Yuriy & van Rooij, Maarten, 2019. "How Does Consumption Respond to News about Inflation? Field Evidence from a Randomized Control Trial," IZA Discussion Papers 12498, Institute of Labor Economics (IZA).
    2. Coibion, Olivier & Gorodnichenko, Yuriy & Kumar, Saten & Pedemonte, Mathieu, 2020. "Inflation expectations as a policy tool?," Journal of International Economics, Elsevier, vol. 124(C).
    3. Peter Andre & Carlo Pizzinelli & Christopher Roth & Johannes Wohlfart, 2019. "Subjective Models of the Macroeconomy: Evidence from Experts and a Representative Sample," CESifo Working Paper Series 7850, CESifo.
    4. George-Marios Angeletos & Zhen Huo & Karthik A. Sastry, 2020. "Imperfect Macroeconomic Expectations: Evidence and Theory," NBER Chapters, in: NBER Macroeconomics Annual 2020, volume 35, National Bureau of Economic Research, Inc.
    5. Haaland, Ingar & Roth, Christopher & Wohlfart. Johannes, 2020. "Designing Information Provision Experiments," The Warwick Economics Research Paper Series (TWERPS) 1275, University of Warwick, Department of Economics.
    6. Rupal Kamdar, 2019. "The Inattentive Consumer: Sentiment and Expectations," 2019 Meeting Papers 647, Society for Economic Dynamics.
    7. CHEN Cheng & SENGA Tatsuro & SUN Chang & ZHANG Hongyong, 2018. "Uncertainty, Imperfect Information, and Expectation Formation over the Firm's Life Cycle," Discussion papers 18010, Research Institute of Economy, Trade and Industry (RIETI).
    8. Hills, Timothy S. & Nakata, Taisuke & Schmidt, Sebastian, 2019. "Effective lower bound risk," European Economic Review, Elsevier, vol. 120(C).
    9. Claudio Michelacci & Luigi Paciello, 2020. "Aggregate Risk or Aggregate Uncertainty? Evidence from UK Households," EIEF Working Papers Series 2006, Einaudi Institute for Economics and Finance (EIEF), revised Apr 2020.
    10. Enders, Zeno & Hünnekes, Franziska & Müller, Gernot J., 2019. "Monetary policy announcements and expectations: Evidence from german firms," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 45-63.
    11. Bachmann, Rüdiger, 2019. "Comments on “Monetary policy announcements and expectations: Evidence from German firms”," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 64-68.
    12. Dovern, Jonas & Müller, Lena Sophia & Wohlrabe, Klaus, 2020. "How Do Firms Form Expectations of Aggregate Growth? New Evidence from a Large-scale Business Survey," Working Papers 15, German Research Foundation's Priority Programme 1859 "Experience and Expectation. Historical Foundations of Economic Behaviour", Humboldt University Berlin.
    13. Saten Kumar, 2020. "Firms’ Asset Holdings and Inflation Expectations," Working Papers 2020-01, Auckland University of Technology, Department of Economics, revised Dec 2019.
    14. Concetta Rondinelli & Roberta Zizza, 2020. "Spend today or spend tomorrow? The role of inflation expectations in consumer behaviour," Temi di discussione (Economic working papers) 1276, Bank of Italy, Economic Research and International Relations Area.
    15. Philippe Andrade & Olivier Coibion & Erwan Gautier & Yuriy Gorodnichenko, 2020. "No Firm Is an Island? How Industry Conditions Shape Firms’ Expectations," Working Papers 20-17, Federal Reserve Bank of Boston.
    16. Arpita Patnaik & Matthew J. Wiswall & Basit Zafar, 2020. "College Majors," NBER Working Papers 27645, National Bureau of Economic Research, Inc.
    17. Adriana Grasso & Tiziano Ropele, 2018. "Firms’ inflation expectations and investment plans," Temi di discussione (Economic working papers) 1203, Bank of Italy, Economic Research and International Relations Area.
    18. Bholat, David & Broughton, Nida & Ter Meer, Janna & Walczak, Eryk, 2019. "Enhancing central bank communications using simple and relatable information," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 1-15.
    19. Vizhdan Boranova & Raju Huidrom & Sylwia Nowak & Petia Topalova & Volodymyr Tulin & Richard Varghese, 2019. "Wage Growth and Inflation in Europe: A Puzzle?," IMF Working Papers 2019/280, International Monetary Fund.
    20. Kumar, Saten, 2020. "Firms’ asset holdings and inflation expectations," Journal of Economic Behavior & Organization, Elsevier, vol. 170(C), pages 193-205.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bernardo Candia & Olivier Coibion & Yuriy Gorodnichenko, 2020. "Communication and the Beliefs of Economic Agents," NBER Working Papers 27800, National Bureau of Economic Research, Inc.
    2. Erwan Gautier & Eric Mengus, 2020. "What Matters in Households’ Inflation Expectations?Author-Name: Philippe Andrade," Working papers 770, Banque de France.
    3. Coibion, Olivier & Gorodnichenko, Yuriy & Kumar, Saten & Pedemonte, Mathieu, 2020. "Inflation expectations as a policy tool?," Journal of International Economics, Elsevier, vol. 124(C).
    4. Adriana Grasso & Tiziano Ropele, 2018. "Firms’ inflation expectations and investment plans," Temi di discussione (Economic working papers) 1203, Bank of Italy, Economic Research and International Relations Area.
    5. Olivier Coibion & Dimitris Georgarakos & Yuriy Gorodnichenko & Maarten van Rooij, 2019. "How does consumption respond to news about inflation? Field evidence from a randomized control trial," DNB Working Papers 651, Netherlands Central Bank, Research Department.
    6. Enders, Zeno & Hünnekes, Franziska & Müller, Gernot J., 2019. "Monetary policy announcements and expectations: Evidence from german firms," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 45-63.
    7. Olivier Coibion & Yuriy Gorodnichenko & Michael Weber, 2019. "Monetary Policy Communications and their Effects on Household Inflation Expectations," NBER Working Papers 25482, National Bureau of Economic Research, Inc.
    8. Coibion, Olivier & Georgarakos, Dimitris & Gorodnichenko, Yuriy & Weber, Michael, 2020. "Forward Guidance and Household Expectations," IZA Discussion Papers 12979, Institute of Labor Economics (IZA).
    9. Olivier Coibion & Yuriy Gorodnichenko & Michael Weber & Michael Weber, 2019. "Monetary Policy Communications and their Effects on Household Inflation Expectations," CESifo Working Paper Series 7464, CESifo.
    10. D'Acunto, Francesco & Hoang, Daniel & Paloviita, Maritta & Weber, Michael, 2019. "IQ, Expectations, and Choice," Research Discussion Papers 2/2019, Bank of Finland.
    11. Goldfayn-Frank, Olga & Wohlfart, Johannes, 2020. "Expectation formation in a new environment: Evidence from the German reunification," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 301-320.
    12. Hibiki Ichiue & Maiko Koga & Tatsushi Okuda & Tatsuya Ozaki, 2019. "Households' Liquidity Constraint, Optimal Attention Allocation, and Inflation Expectations," Bank of Japan Working Paper Series 19-E-8, Bank of Japan.
    13. Andrade Philippe & Coibion Olivier & Gautier Erwan & Gorodnichenko Yuriy, 2020. "No Firm Is an Island? How Industry Conditions Shape Firms’ Expectations," Working papers 780, Banque de France.
    14. Angeletos, G.-M. & Lian, C., 2016. "Incomplete Information in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1065-1240, Elsevier.
    15. Bachmann, Rüdiger, 2019. "Comments on “Monetary policy announcements and expectations: Evidence from German firms”," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 64-68.
    16. Lieb, Lenard & Schuffels, Johannes, 2020. "Inflation expectations and consumer spending: the role of household balance sheets (RM/19/022-revised-)," Research Memorandum 006, Maastricht University, Graduate School of Business and Economics (GSBE).
    17. Alexandros Botsis & Christoph Görtz & Plutarchos Sakellaris, 2020. "Quantifying Qualitative Survey Data: New Insights on the (Ir)Rationality of Firms' Forecasts," CESifo Working Paper Series 8148, CESifo.
    18. Oleksiy Kryvtsov & Luba Petersen, 2019. "Central Bank Communication That Works: Lessons from Lab Experiments," Staff Working Papers 19-21, Bank of Canada.
    19. Francesco D’Acunto & Ulrike Malmendier & Juan Ospina & Michael Weber, 2019. "Exposure to Daily Price Changes and Inflation Expectations," NBER Working Papers 26237, National Bureau of Economic Research, Inc.
    20. Rupal Kamdar, 2019. "The Inattentive Consumer: Sentiment and Expectations," 2019 Meeting Papers 647, Society for Economic Dynamics.

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bdi:wptemi:td_1219_19. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/bdigvit.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.