Expectations and the Phillips Curve: Evidence from Sectoral Survey Data

Abstract

For Germany and Switzerland, unlike for the US, data from periodic surveys of producing firms exist. These surveys cover questions regarding price setting and output decisions that are relevant for the study of inflation dynamics. The New Keynesian Phillips curve, in particular, holds that prices are set by forward-looking, profit-maximizing firms. In this perspective the expectations that, presumably, drive prices relate to prospective prices within the industry. By contrast, an older tradition of the Phillips curve sees expectations of economy-wide inflation as a key driving variable. With survey data covering firms in separate industries we can address this question and find support for the modern view of the price setting process. Moreover, the evidence points to output rather than capacity limitations as an additional key variable. The results of our econometric estimates suggest that the price setting process has essentially remained unchanged in the years after the great recession.

Keywords: Inflation, expectations, survey data, sectoral analysis

JEL Classification: E31, C83, D84