Firms’ asset holdings and inflation expectations

Abstract

This paper investigates the relationship between firms' inflation expectations and their holdings of liquid assets. We implement a new quantitative survey of firms' expectations about inflation in New Zealand. We find that firms that hold more shares of liquid assets systematically report lower inflation expectations. Moreover, we implement an experiment by providing firms new exogenous information about recent inflation dynamics. This experiment allows us to assess how firms respond to new information in terms of belief revisions and firm-level decisions.

Expectations, Economic Uncertainty, and Sentiment

“…Better forecasts and parameter estimation help reduce errors in financial management, allowing better investment decisions, with more accurate asset pricing (Baker & Wurgler, 2007;, and decisions on the proportion of liquid assets to be held by companies facing expected inflation (Kumar, 2020).…”