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Inflation Expectations and Firm Decisions: New Causal Evidence

Author

Listed:
  • Coibion, Olivier

    (University of Texas at Austin)

  • Gorodnichenko, Yuriy

    (University of California, Berkeley)

  • Ropele, Tiziano

    (Bank of Italy)

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 (or the European Central Bank's inflation target) 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 their utilization of credit, and reduce their employment. 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.

Suggested Citation

  • Coibion, Olivier & Gorodnichenko, Yuriy & Ropele, Tiziano, 2018. "Inflation Expectations and Firm Decisions: New Causal Evidence," IZA Discussion Papers 12037, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp12037
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    More about this item

    Keywords

    inflation expectations; surveys; inattention;
    All these keywords.

    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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