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Inflation Expectations and Firm Decisions: New Causal Evidence

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  • Olivier Coibion
  • Yuriy Gorodnichenko
  • Tiziano Ropele

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 demand for credit, and reduce their employment and capital. 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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  • Olivier Coibion & Yuriy Gorodnichenko & Tiziano Ropele, 2018. "Inflation Expectations and Firm Decisions: New Causal Evidence," NBER Working Papers 25412, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:25412
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    Cited by:

    1. Coibion, Olivier & Georgarakos, Dimitris & Gorodnichenko, Yuriy & van Rooij, Maarten, 2019. "How Does Consumption Respond to News about Inflation? Field Evidence from a Randomized Control Trial," IZA Discussion Papers 12498, Institute of Labor Economics (IZA).
    2. Ingar K. Haaland & Christopher Roth & Johannes Wohlfart, 2020. "Designing Information Provision Experiments," CESifo Working Paper Series 8406, CESifo.
    3. Enders, Zeno & Hünnekes, Franziska & Müller, Gernot J., 2019. "Monetary policy announcements and expectations: Evidence from german firms," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 45-63.
    4. CHEN Cheng & SENGA Tatsuro & SUN Chang & ZHANG Hongyong, 2018. "Uncertainty, Imperfect Information, and Expectation Formation over the Firm's Life Cycle," Discussion papers 18010, Research Institute of Economy, Trade and Industry (RIETI).
    5. Coibion, Olivier & Gorodnichenko, Yuriy & Kumar, Saten & Pedemonte, Mathieu, 2020. "Inflation expectations as a policy tool?," Journal of International Economics, Elsevier, vol. 124(C).
    6. Andrade Philippe & Coibion Olivier & Gautier Erwan & Gorodnichenko Yuriy, 2020. "No Firm Is an Island? How Industry Conditions Shape Firms’ Expectations," Working papers 780, Banque de France.
    7. Hills, Timothy S. & Nakata, Taisuke & Schmidt, Sebastian, 2019. "Effective lower bound risk," European Economic Review, Elsevier, vol. 120(C).
    8. George-Marios Angeletos & Zhen Huo & Karthik A. Sastry, 2020. "Imperfect Macroeconomic Expectations: Evidence and Theory," NBER Chapters, in: NBER Macroeconomics Annual 2020, volume 35, National Bureau of Economic Research, Inc.
    9. Arpita Patnaik & Matthew J. Wiswall & Basit Zafar, 2020. "College Majors," NBER Working Papers 27645, National Bureau of Economic Research, Inc.
    10. Peter Andre & Carlo Pizzinelli & Christopher Roth & Johannes Wohlfart, 2019. "Subjective Models of the Macroeconomy: Evidence from Experts and a Representative Sample," CESifo Working Paper Series 7850, CESifo.
    11. Bachmann, Rüdiger, 2019. "Comments on “Monetary policy announcements and expectations: Evidence from German firms”," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 64-68.
    12. Concetta Rondinelli & Roberta Zizza, 2020. "Spend today or spend tomorrow? The role of inflation expectations in consumer behaviour," Temi di discussione (Economic working papers) 1276, Bank of Italy, Economic Research and International Relations Area.
    13. Haaland, Ingar & Roth, Christopher & Wohlfart. Johannes, 2020. "Designing Information Provision Experiments," The Warwick Economics Research Paper Series (TWERPS) 1275, University of Warwick, Department of Economics.
    14. Kumar, Saten, 2020. "Firms’ asset holdings and inflation expectations," Journal of Economic Behavior & Organization, Elsevier, vol. 170(C), pages 193-205.
    15. Ingar Haaland & Christopher Roth & Johannes Wohlfart, 2020. "Designing Information Provision Experiments," CEBI working paper series 20-20, University of Copenhagen. Department of Economics. The Center for Economic Behavior and Inequality (CEBI).
    16. Rupal Kamdar, 2019. "The Inattentive Consumer: Sentiment and Expectations," 2019 Meeting Papers 647, Society for Economic Dynamics.
    17. Dovern, Jonas & Müller, Lena Sophia & Wohlrabe, Klaus, 2020. "How Do Firms Form Expectations of Aggregate Growth? New Evidence from a Large-scale Business Survey," Working Papers 15, German Research Foundation's Priority Programme 1859 "Experience and Expectation. Historical Foundations of Economic Behaviour", Humboldt University Berlin.
    18. Saten Kumar, 2020. "Firms’ Asset Holdings and Inflation Expectations," Working Papers 2020-01, Auckland University of Technology, Department of Economics, revised Dec 2019.
    19. Vizhdan Boranova & Raju Huidrom & Sylwia Nowak & Petia Topalova & Volodymyr Tulin & Richard Varghese, 2019. "Wage Growth and Inflation in Europe: A Puzzle?," IMF Working Papers 19/280, International Monetary Fund.
    20. Claudio Michelacci & Luigi Paciello, 2020. "Aggregate Risk or Aggregate Uncertainty? Evidence from UK Households," EIEF Working Papers Series 2006, Einaudi Institute for Economics and Finance (EIEF), revised Apr 2020.
    21. Adriana Grasso & Tiziano Ropele, 2018. "Firms’ inflation expectations and investment plans," Temi di discussione (Economic working papers) 1203, Bank of Italy, Economic Research and International Relations Area.
    22. Bholat, David & Broughton, Nida & Ter Meer, Janna & Walczak, Eryk, 2019. "Enhancing central bank communications using simple and relatable information," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 1-15.

    More about this item

    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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