How Do Firms Form Their Expectations? New Survey Evidence

Abstract

We survey New Zealand firms and document novel facts about their macroeconomic beliefs. There is widespread dispersion in beliefs about past and future macroeconomic conditions, especially inflation. This dispersion in beliefs is consistent with firms’ incentives to collect and process information. Using experimental methods, we find that firms update their beliefs in a Bayesian manner when presented with new information about the economy and that changes in their beliefs affect their decisions. Inflation is not generally perceived as being important to business decisions so firms devote few resources to collecting and processing information about inflation. (JEL D22, D83, D84, E31, E52)

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.…”

“…It is most closely related to recent work using randomized information treatments to characterize how agents learn and respond to new information. 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.…”

No Firm Is an Island? How Industry Conditions Shape Firms’ Expectations

“…There is a strong positive relationship between firms' anticipated price changes and ex post actual price changes. This is consistent with other survey evidence on firms' expected price changes (for example, Coibion, Gorodnichenko, and Kumar [2018] for firms in New Zealand, and Coibion, Gorodnichenko, and Ropele [2020] for firms in Italy) closely lining up with ex post price changes.…”

“…This result also provides additional evidence that firms' expectations are reflected in their decisions: When they report higher expectations for their future prices, they ultimately tend to raise their prices. This complements previous work that finds a strong unconditional correlation between firms' expectations of their future price changes and ex post price changes (for example, Coibion, Gorodnichenko, and Kumar 2018). In this case, however, we show a similar finding conditional on either aggregate fluctuations or industry-specific variation.…”

Anchored or de-anchored? That is the question

“…There is evidence that firms' and households' expectations may be biased. Coibion, Gorodnichenko and Kumar (2018) show that one-year ahead firms' and households' inflation expectations in New Zealand exhibit a significant upward bias compared with professional forecasters, notwithstanding more than three decades of inflation targeting by the Reserve Bank of New Zealand.…”