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No firm is an island? How industry conditions shape firms’ expectations

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  • Andrade, Philippe
  • Coibion, Olivier
  • Gautier, Erwan
  • Gorodnichenko, Yuriy

Abstract

Using a survey of French manufacturing firms, we study how firms’ expectations and actions are affected by both aggregate and industry-specific conditions. In response to industry-level shocks that have no aggregate effects, firms’ aggregate expectations respond persistently. This is consistent with “island” models in which firms use the local prices they observe to make inferences about broader aggregate conditions. These patterns are related to observable characteristics of firms and the industries in which they reside. Finally, we extend the analysis to firms’ expectations over their own future price changes and document how these respond to both industry and aggregate variation.

Suggested Citation

  • Andrade, Philippe & Coibion, Olivier & Gautier, Erwan & Gorodnichenko, Yuriy, 2022. "No firm is an island? How industry conditions shape firms’ expectations," Department of Economics, Working Paper Series qt93g54490, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    • Handle: RePEc:cdl:econwp:qt93g54490
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