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Can firms see into the future? Survey evidence from Germany

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  • Massenot, Baptiste
  • Pettinicchi, Yuri

Abstract

This paper presents new evidence on the expectation formation process of firms from a survey of the German manufacturing sector. It focuses on the expectation about their future business conditions, which enters the widely followed economic sentiment index and which is an important determinant of their employment and investment decisions. We find that firms extrapolate their experience too much and make predictable forecasting errors. Moreover, firms do not seem to anticipate the upcoming reversals of business cycle peaks and troughs which causes suboptimal adjustment of investment and employment and affects their inventories and profits. However, the impact on expectation errors decreases with the size and the age of the firm as firms learn to reduce their extrapolation bias over time.

Suggested Citation

  • Massenot, Baptiste & Pettinicchi, Yuri, 2017. "Can firms see into the future? Survey evidence from Germany," SAFE Working Paper Series 187, Leibniz Institute for Financial Research SAFE.
    • Handle: RePEc:zbw:safewp:187
    DOI: 10.2139/ssrn.3071576
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    More about this item

    Keywords

    Expectation Formation; Expectation Error; Learning; Extrapolation; Experience;
    All these keywords.

    JEL classification:

    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • E70 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - General

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