IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/17768.html

Firm Expectations and News: Micro v Macro

Author

Listed:
  • Born, Benjamin
  • Enders, Zeno
  • Menkhoff, Manuel
  • Müller, Gernot
  • Niemann, Knut

Abstract

Firm expectations reflect micro and macro news: information about firm-level developments and the aggregate economy. We formalize this notion in a stylized general-equilibrium model where firms face a signal-extraction problem and study the implications of ‘island illusion,’ meaning that firms systematically underestimate the importance of aggregate developments for their own performance. Island illusion is governed by a single parameter that captures the departure from rational expectations. It imposes joint restrictions on the impact of micro and macro news that we confront with survey data for Italian and German firms. While both surveys differ along many dimensions, we find robustly that firms’ expectations about their own prices and output overreact to micro news and underreact to macro news—just like the model predicts for island illusion. Moreover, also consistent with the model, we find the extent of overreaction and underreaction to co-move positively, both over time and across firms.

Suggested Citation

  • Born, Benjamin & Enders, Zeno & Menkhoff, Manuel & Müller, Gernot & Niemann, Knut, 2022. "Firm Expectations and News: Micro v Macro," CEPR Discussion Papers 17768, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17768
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP17768
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or

    for a different version of it.

    Other versions of this item:

    Citations

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


    Cited by:

    1. is not listed on IDEAS
    2. Sebastian Blesse & Florian Buhlmann & Philipp Heil & Davud Rostam-Afschar, 2025. "Local Policy Misperceptions and Investment: Experimental Evidence from Firm Decision Makers," CESifo Working Paper Series 11855, CESifo.
    3. Schmidt, Torsten & Müller, Henrik & Rieger, Jonas & Schmidt, Tobias & Jentsch, Carsten, 2023. "Inflation perception and the formation of inflation expectations," Ruhr Economic Papers 1025, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    4. Balleer, Almut & Noeller, Marvin, 2023. "Monetary policy in the presence of supply constraints: Evidence from German firm-level data," Ruhr Economic Papers 1060, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    5. Almut Balleer & Marvin Noeller, 2023. "Monetary Policy in the Presence of Supply Constraints: Evidence from German Firm-Level Data," CESifo Working Paper Series 10261, CESifo.
    6. Chan, Jenny, 2024. "Monetary policy and sentiment-driven fluctuations," Journal of Economic Theory, Elsevier, vol. 222(C).
    7. Jenny Chan, 2024. "Monetary policy and sentiment-driven fluctuations," Bank of England working papers 1106, Bank of England.
    8. Francesco Bianchi & Cosmin L. Ilut & Hikaru Saijo, 2024. "Smooth Diagnostic Expectations," NBER Working Papers 32152, National Bureau of Economic Research, Inc.
    9. Nöller, Marvin & Balleer, Almut, 2023. "Monetary Policy in the Presence of Supply Constraints: Evidence from German Firm-level Data," VfS Annual Conference 2023 (Regensburg): Growth and the "sociale Frage" 277638, Verein für Socialpolitik / German Economic Association.
    10. Lukas Hack & Davud Rostam-Afschar, 2024. "Understanding Firm Dynamics with Daily Data," CRC TR 224 Discussion Paper Series crctr224_2024_593, University of Bonn and University of Mannheim, Germany.
    11. Robert Lehmann, 2023. "The Forecasting Power of the ifo Business Survey," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 19(1), pages 43-94, March.
    12. Petre Caraiani & Nazli Karamollaoglu & Cihan Yalcin, 2025. "Financial Conditions, Uncertainty and Expectations Errors of Firms," Working Papers 2515, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    13. Dovern, Jonas & Müller, Lena Sophia & Wohlrabe, Klaus, 2023. "Local information and firm expectations about aggregates," Journal of Monetary Economics, Elsevier, vol. 138(C), pages 1-13.
    14. Daria Minina & Gabriele Galati & Richhild Moessner & Maarten van Rooij, 2024. "The effect of information on consumer inflation expectations," Working Papers 810, DNB.
    15. Zaremba, Adam & Cakici, Nusret & Bianchi, Robert J. & Long, Huaigang, 2023. "Interest rate changes and the cross-section of global equity returns," Journal of Economic Dynamics and Control, Elsevier, vol. 147(C).

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy

    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:cpr:ceprdp:17768. 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.

    We have no bibliographic references for this item. You can help adding them by using 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: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    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.