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Beliefs That Move the Economy: Shocks to Firms’ and Households’ Inflation Expectations

Author

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  • Paweł Galiński

Abstract

This paper examines shocks to inflation expectations and argues that distinguishing between households’ and firms’ expectations is crucial for understanding their macroeconomic role. First, using an analytical example, I demonstrate that shocks to firms’ expectations are stagflationary, whereas shocks to households’ expectations are expansionary. Second, household expectations are found to be more exposed to expectation shocks than those of firms. Third, shocks to firms' inflation expectations are a key driver of output, inflation, and real wages, while shocks to households' expectations contribute primarily to wage dynamics. These results imply that monetary policy should place greater weight on firms’ expectations than on those of households.

Suggested Citation

  • Paweł Galiński, 2026. "Beliefs That Move the Economy: Shocks to Firms’ and Households’ Inflation Expectations," KAE Working Papers 2026-120, Warsaw School of Economics, Collegium of Economic Analysis.
    • Handle: RePEc:sgh:kaewps:2026120
    DOI: 10.33119/kaewps2026120
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    File URL: https://hdl.handle.net/20.500.12182/1440
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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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