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Firm expectations and news: Micro v macro

Author

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  • Born, Benjamin
  • Enders, Zeno
  • Menkhoff, Manuel
  • Müller, Gernot J.
  • Niemann, Knut

Abstract

Using firm-level data, we study how firm expectations adjust to news while accounting for a) the heterogeneity of news and b) the heterogeneity of firms. We classify news as either micro or macro, that is, information about firm-specific developments or information about the aggregate economy. Survey data for German and Italian firms allows us to reject rational expectations: Both types of news predict forecast errors at the firm level. Yet while firm expectations overreact to micro news, they underreact to macro news. We propose a general-equilibrium model where firms suffer from 'island illusion' to explain these patterns in the data.

Suggested Citation

  • Born, Benjamin & Enders, Zeno & Menkhoff, Manuel & Müller, Gernot J. & Niemann, Knut, 2023. "Firm expectations and news: Micro v macro," Working Papers 43, German Research Foundation's Priority Programme 1859 "Experience and Expectation. Historical Foundations of Economic Behaviour", Humboldt University Berlin.
    • Handle: RePEc:zbw:pp1859:43
    DOI: 10.18452/26901
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    Cited by:

    1. 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.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. 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).

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    More about this item

    Keywords

    Survey data; salience; overreaction; underreaction; micro news; macro news; island illusion; business cycle;
    All these 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

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