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Inflation Expectations and Firms’ Decisions: New Causal Evidence

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  • Coibion, Olivier
  • Gorodnichenko, Yuriy
  • Ropele, Tiziano

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.
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Suggested Citation

  • Coibion, Olivier & Gorodnichenko, Yuriy & Ropele, Tiziano, 2019. "Inflation Expectations and Firms’ Decisions: New Causal Evidence," Department of Economics, Working Paper Series qt71v7h37f, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    • Handle: RePEc:cdl:econwp:qt71v7h37f
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    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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