Working Paper: NBER ID: w27317
Authors: Philippe Andrade; Olivier Coibion; Erwan Gautier; Yuriy Gorodnichenko
Abstract: We study how firms’ expectations and actions are affected by both aggregate and industry-specific conditions using a survey of French manufacturing firms. We document two novel features. First, the adjustment of firms’ expectations is more rapid after industry-specific shocks than aggregate shocks. This is consistent with rational inattention models which predict that firms should pay more attention to industry variation than aggregate conditions. Second, in response to industry shocks that have no aggregate effects, firms’ aggregate expectations respond. This is consistent with “island” models in which firms use the specific prices they observe to make inferences about broader aggregate conditions. We also study how these results vary across industries.
Keywords: expectations; industry shocks; aggregate conditions; rational inattention; island models
JEL Codes: E2; E3; E4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Industry shocks (F69) | Firms' price expectations (L11) |
| Aggregate shocks (E19) | Firms' price expectations (L11) |
| Industry shocks (F69) | Firms' aggregate expectations (D84) |
| Firms' aggregate expectations (D84) | Broader economic conditions (E66) |
| Industry shocks (F69) | Aggregate shocks (E19) |