Working Paper: NBER ID: w25412
Authors: Olivier Coibion; Yuriy Gorodnichenko; Tiziano Ropel
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.
Keywords: Inflation Expectations; Firm Decisions; Causal Evidence
JEL Codes: E2; E3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher inflation expectations (E31) | raise their prices (D49) |
| higher inflation expectations (E31) | increase demand for credit (E51) |
| higher inflation expectations (E31) | reduce their employment (J63) |
| higher inflation expectations (E31) | reduce their capital (G32) |
| 1 percentage point increase in inflation expectations (E31) | 0.2 percentage point increase in reported annual price changes (E31) |
| 1 percentage point increase in inflation expectations (E31) | 0.7% reduction in employment after 12 months (J63) |
| higher inflation expectations (E31) | significant differences in inflation expectations between treated and control firms (E31) |