NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Inflation Expectations and Firm Decisions: New Causal Evidence

Olivier Coibion, Yuriy Gorodnichenko, Tiziano Ropele

NBER Working Paper No. 25412
Issued in December 2018, Revised in February 2019
NBER Program(s):Economic Fluctuations and Growth, International Finance and Macroeconomics, Monetary Economics

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 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.

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Document Object Identifier (DOI): 10.3386/w25412

 
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