Working Paper: NBER ID: w30537
Authors: Tiziano Ropele; Yuriy Gorodnichenko; Olivier Coibion
Abstract: We match survey data of Italian firms that includes a repeated experiment in which information about inflation is randomly provided to firms over time with detailed credit data that covers the borrowing decisions of firms. This allows us to study how exogenous variation in inflation expectations causally affects the borrowing decisions of Italian firms. We document a number of new results. Firms with exogenously higher inflation expectations end up paying higher interest rates on average but do not change the overall demand of loans. Instead, we find a significant rebalancing of firms’ borrowing decisions away from lower-interest long-term loans and toward higher-interest short-term loans. In anticipation of rising future interest rates linked to higher expected inflation, firms also take on new long-term loans to pay down existing loans, thereby locking in interest rate savings. Firms that are relatively more knowledgeable about financial tools engage in the latter particularly strongly.
Keywords: Inflation Expectations; Corporate Borrowing; Causal Evidence
JEL Codes: E02; E03
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher inflation expectations (E31) | Higher interest rates (E43) |
| Higher inflation expectations (E31) | Reallocation towards short-term loans (G51) |
| Financial literacy moderates the relationship between higher inflation expectations and borrowing decisions (G53) | Higher interest rates (E43) |
| Higher inflation expectations (E31) | Decline in total credit granted (G21) |
| Reallocation towards short-term loans (G51) | Increase in average interest rates paid (E43) |
| Higher inflation expectations (E31) | Changes in borrowing behavior (G51) |