IDEAS home Printed from https://ideas.repec.org/p/boe/boeewp/1087.html
   My bibliography  Save this paper

Firms’ sales expectations and marginal propensity to invest

Author

Listed:
  • Andrea Alati

    (Bank of England)

  • Johannes J Fischer

    (Deutsche Bundesbank)

  • Maren Froemel

    (Bank of England)

  • Ozgen Ozturk

    (University of Oxford)

Abstract

How do firms adjust their investment in response to sales shocks and what determines the response? Using a unique firm‑level survey, we propose a novel approach to estimate UK firms’ marginal propensity to invest (MPI) out of additional income: the forecast error of their sales growth expectations. Investment responds significantly to these sales surprises, with a 1 percentage point unexpected growth in sales translating into a 0.31 percentage point increase in capital expenditure. Firms that are more attentive to the state of the economy are more responsive, consistent with sales growth surprises providing firms with information about their demand. Sales growth surprises also cause firms to increase their prices, supporting this interpretation. We do not find evidence that these results are driven by financial frictions, uncertainty, or productivity shocks.

Suggested Citation

  • Andrea Alati & Johannes J Fischer & Maren Froemel & Ozgen Ozturk, 2024. "Firms’ sales expectations and marginal propensity to invest," Bank of England working papers 1087, Bank of England.
    • Handle: RePEc:boe:boeewp:1087
    as

    Download full text from publisher

    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2024/firms-sales-expectations-and-marginal-propensity-to-invest.pdf
    File Function: Full text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Aubhik Khan & Julia K. Thomas, 2013. "Credit Shocks and Aggregate Fluctuations in an Economy with Production Heterogeneity," Journal of Political Economy, University of Chicago Press, vol. 121(6), pages 1055-1107.
    2. Hebous, Shafik & Zimmermann, Tom, 2021. "Can government demand stimulate private investment? Evidence from U.S. federal procurement," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 178-194.
    3. George W. Evans, 2001. "Expectations in Macroeconomics. Adaptive versus Eductive Learning," Revue Économique, Programme National Persée, vol. 52(3), pages 573-582.
    4. Priit Jeenas, 2023. "Firm balance sheet liquidity, monetary policy shocks, and investment dynamics," Economics Working Papers 1872, Department of Economics and Business, Universitat Pompeu Fabra.
    Full references (including those not matched with items on IDEAS)

    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. Andrea Alati & Johannes J. Fischer & Maren Froemel & Ozgen Ozturk, 2024. "Firms’ Sales Expectations and Marginal Propensity to Invest," Discussion Papers 2424, Centre for Macroeconomics (CFM).
    2. Sylvain Catherine & Thomas Chaney & Zongbo Huang & David Sraer & David Thesmar, 2022. "Quantifying Reduced‐Form Evidence on Collateral Constraints," Journal of Finance, American Finance Association, vol. 77(4), pages 2143-2181, August.
    3. Miguel Casares & Luca Deidda & Jose E. Galdon-Sanchez, 2013. "Business cycle and monetary policy analysis with market rigidities and financial frictions," Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra 1304, Departamento de Economía - Universidad Pública de Navarra.
    4. Jason Lennard & Finn Meinecke & Solomos Solomou, 2023. "Measuring inflation expectations in interwar Britain," Economic History Review, Economic History Society, vol. 76(3), pages 844-870, August.
    5. Xing Guo, 2020. "Identifying Aggregate Shocks with Micro-level Heterogeneity: Financial Shocks and Investment Fluctuation," Staff Working Papers 20-17, Bank of Canada.
    6. Hommes, Cars & Huber, Stefanie J. & Minina, Daria & Salle, Isabelle, 2024. "Learning in a complex world: Insights from an OLG lab experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 220(C), pages 813-837.
    7. Mariam Camarero & María Dolores Gadea-Rivas & Ana Gómez-Loscos & Cecilio Tamarit, 2019. "External imbalances and recoveries," Working Papers 1912, Department of Applied Economics II, Universidad de Valencia.
    8. Xiaoyu Gao & Anjie Dong, 2020. "Real estate prices, fiscal revenue and economic growth," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 10(2), pages 1-7.
    9. YiLi Chien & In-Koo Cho & B. Ravikumar, 2021. "Stability and Equilibrium Selection in Learning Models: A Note of Caution," Review, Federal Reserve Bank of St. Louis, vol. 103(4), pages 477-488, October.
    10. Berardi, Michele, 2007. "Heterogeneity and misspecifications in learning," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3203-3227, October.
    11. Meenagh, David & Minford, Patrick & Xu, Yongdeng, 2022. "Targeting moments for calibration compared with indirect inference," Cardiff Economics Working Papers E2022/12, Cardiff University, Cardiff Business School, Economics Section.
    12. António R. Antunes & Tiago Cavalcanti, 2019. "Tighter Credit and Consumer Bankruptcy Insurance," Working Papers w201921, Banco de Portugal, Economics and Research Department.
    13. Klaus Adam & Albert Marcet & Juan Pablo Nicolini, 2016. "Stock Market Volatility and Learning," Journal of Finance, American Finance Association, vol. 71(1), pages 33-82, February.
    14. Honkapohja, Seppo & McClung, Nigel, 2021. "On Robustness of Average Inflation Targeting," CEPR Discussion Papers 16001, C.E.P.R. Discussion Papers.
    15. Cristina Arellano & Yan Bai & Luigi Bocola, 2017. "Sovereign risk and firm heterogeneity," Staff Report 547, Federal Reserve Bank of Minneapolis.
    16. Inkoo Cho & Noah Williams, 2024. "Collusive Outcomes Without Collusion," Papers 2403.07177, arXiv.org.
    17. Volha Audzei & Sergey Slobodyan, 2024. "Dynamic Sparse Restricted Perceptions Equilibria," CERGE-EI Working Papers wp792, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    18. Petrosky-Nadeau, Nicolas, 2013. "TFP during a credit crunch," Journal of Economic Theory, Elsevier, vol. 148(3), pages 1150-1178.
    19. Javier Bianchi & Enrique G. Mendoza, 2018. "Optimal Time-Consistent Macroprudential Policy," Journal of Political Economy, University of Chicago Press, vol. 126(2), pages 588-634.
    20. Alessandra Bonfiglioli & Rosario Crinò & Gino Gancia, 2019. "Trade, Finance, and Endogenous Firm Heterogeneity," Journal of the European Economic Association, European Economic Association, vol. 17(1), pages 79-130.

    More about this item

    Keywords

    Investment; survey data; corporate finance; financial frictions; learning;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

    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:boe:boeewp:1087. See general information about how to correct material in RePEc.

    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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Digital Media Team (email available below). General contact details of provider: https://edirc.repec.org/data/boegvuk.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.