Inflation Expectations and Firm Decisions: New Causal Evidence*

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 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 demand for credit, and reduce their employment and capital. 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.

Monetary Policy Communications and their Effects on Household Inflation Expectations

“…Three months later, the average expectations of these treated individuals are still lower than those of the control group, with the effect having dissipated by about 75%, and the effects have fully dissipated after six months. 6 This persistence of information treatments is consistent with those observed in previous work (Coibion et al 2018b, Coibion, Gorodnichenko and Kumar 2018, Coibion, Gorodnichenko and Ropele 2018, and Cavallo et al 2017.…”

“…Instead, they seem to hold a supply-side view of unemployment and inflation, associating higher levels of one with the other. This is the same pattern as that observed in Italian firms (Coibion, Gorodnichenko and Ropele, 2018) or in U.S. households (Kamdar 2018). This information effect is still somewhat visible in inflation expectations after three months but is also fully dissipated within six months.…”

“…Randomized information treatments applied to firms in New Zealand, for example, suggest that managers respond strongly to information about recent inflation or the inflation target (Coibion, Gorodnichenko and Kumar 2018) as well as to the higher-order beliefs of other managers (Coibion et al 2018b). Coibion, Gorodnichenko and Ropele (2018) document similarly large responses of firm expectations in Italy to information about recent inflation or the inflation target, as do Humziker et al (2018) for firms in Switzerland. Additional results have also been documented for households: Armantier et al (2016) study the response of households' inflation expectations to professionals' inflation forecasts, Roth and Wohlfart (2018) consider how households respond to professionals' opinions about the likelihood of a recession, while Armona et al (2018) assess how households respond to news about housing prices.…”

Rationally Inattentive Savers and Monetary Policy Changes: A Laboratory Experiment

“…5 In particular, a number of recent papers empirically document the interaction between information rigidities, inflation expectations and monetary policy. Evidence based on surveys of firms (Kumar et al (2015), Coibion et al (2019) show mixed response of the effect of monetary policy on economic outcomes. With respect to households' expectations, Easaw et al (2013), Roth and Wohlfart (2019), Bachmann et al (2015), Binder (2017) and Khaw et al (2017) shows changes in information acquisition that relate to changes in behavioral choices.…”

“…See for firms, inter aliaCoibion et al (2019) andKumar et al (2015) and for households, inter alia,Roth and Wohlfart (2019) andEasaw et al (2013). See Section 1.1 for more references.…”