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Firms' Inflation Expectations and Wage-setting Behaviors


  • Sohei Kaihatsu

    (Bank of Japan)

  • Noriyuki Shiraki

    (Bank of Japan)


This paper aims to examine the formation mechanism of firms' inflation expectations and the relationship between those expectations and wage-setting behaviors. We conduct an empirical analysis based on microdata constructed by matching a business survey for inflation expectations and corporate financial data. Our empirical results demonstrate that firms' short-term and medium- to long-term inflation expectations have significantly increased after the Bank of Japan introduced a price stability target of two percent and quantitative and qualitative monetary easing in 2013. During this period, dispersions of distributions of inflation expectations increased temporarily and then shrank again. These changes vary across business attributes, such as the size of a firm. Therefore, differences in business attributes might result in the heterogeneous reaction of inflation expectations to monetary policy shocks. Furthermore, an empirical analysis using the data from 2004 to 2016 shows that (a) both wages and short-term inflation expectations tend to increase along with medium- to long-term inflation expectations and (b) both wages and operating profits tend to decrease when only short-term inflation expectations increase. The result implies that a balanced economic growth between prices and wages can be achieved when there is an increase in a wide range of firms' medium- to long-term inflation expectations.

Suggested Citation

  • Sohei Kaihatsu & Noriyuki Shiraki, 2016. "Firms' Inflation Expectations and Wage-setting Behaviors," Bank of Japan Working Paper Series 16-E-10, Bank of Japan.
  • Handle: RePEc:boj:bojwps:wp16e10

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    References listed on IDEAS

    1. Leduc, Sylvain & Sill, Keith & Stark, Tom, 2007. "Self-fulfilling expectations and the inflation of the 1970s: Evidence from the Livingston Survey," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 433-459, March.
    2. Sohei Kaihatsu & Jouchi Nakajima, 2015. "Has Trend Inflation Shifted?: An Empirical Analysis with a Regime-Switching Model," Bank of Japan Working Paper Series 15-E-3, Bank of Japan.
    3. repec:aea:aecrev:v:108:y:2018:i:9:p:2671-2713 is not listed on IDEAS
    4. N. Gregory Mankiw & Ricardo Reis & Justin Wolfers, 2004. "Disagreement about Inflation Expectations," NBER Chapters,in: NBER Macroeconomics Annual 2003, Volume 18, pages 209-270 National Bureau of Economic Research, Inc.
    5. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1295-1328.
    6. 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.
    7. Canova, Fabio & Ciccarelli, Matteo, 2013. "Panel Vector Autoregressive Models: A Survey," CEPR Discussion Papers 9380, C.E.P.R. Discussion Papers.
    8. Bryan, Michael F. & Meyer, Brent & Parker, Nicholas B., 2014. "The inflation expectations of firms: what do they look like, are they accurate, and do they matter?," FRB Atlanta Working Paper 2014-27, Federal Reserve Bank of Atlanta, revised 01 Jan 2015.
    9. Carlos Capistrán & Manuel Ramos-Francia, 2010. "Does Inflation Targeting Affect the Dispersion of Inflation Expectations?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(1), pages 113-134, February.
    10. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
    11. Windmeijer, Frank, 2005. "A finite sample correction for the variance of linear efficient two-step GMM estimators," Journal of Econometrics, Elsevier, vol. 126(1), pages 25-51, May.
    12. Yuichiro Ito & Sohei Kaihatsu, 2016. "Effects of Inflation and Wage Expectations on Consumer Spending: Evidence from Micro Data," Bank of Japan Working Paper Series 16-E-7, Bank of Japan.
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    Cited by:

    1. Maiko Koga & Haruko Kato, 2017. "Behavioral Biases in Firms' Growth Expectations," Bank of Japan Working Paper Series 17-E-9, Bank of Japan.
    2. 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.
    3. Yosuke Uno & Saori Naganuma & Naoko Hara, 2018. "New Facts about Firms' Inflation Expectations: Simple Tests for a Sticky Information Model," Bank of Japan Working Paper Series 18-E-14, Bank of Japan.

    More about this item


    firm's inflation expectation; wage-setting behavior; quantitative and qualitative monetary easing; panel VAR;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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