Can Firms See into the Future? Survey Evidence from Germany

33 Pages Posted: 17 Nov 2017

See all articles by Baptiste Massenot

Baptiste Massenot

Goethe University Frankfurt - Research Center SAFE

Yuri Pettinicchi

Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA)

Date Written: November 3, 2017

Abstract

This paper presents new evidence on the expectation formation process of firms from a survey of the German manufacturing sector. It focuses on the expectation about their future business conditions, which enters the widely followed economic sentiment index and which is an important determinant of their employment and investment decisions. We find that firms extrapolate their experience too much and make predictable forecasting errors. Moreover, firms do not seem to anticipate the upcoming reversals of business cycle peaks and troughs which causes suboptimal adjustment of investment and employment and affects their inventories and profits. However, the impact on expectation errors decreases with the size and the age of the firm as firms learn to reduce their extrapolation bias over time.

Keywords: Expectation Formation, Expectation Error, Learning, Extrapolation, Experience

JEL Classification: D90, E70

Suggested Citation

Massenot, Baptiste and Pettinicchi, Yuri, Can Firms See into the Future? Survey Evidence from Germany (November 3, 2017). SAFE Working Paper No. 187. Available at SSRN: https://ssrn.com/abstract=3071576 or http://dx.doi.org/10.2139/ssrn.3071576

Baptiste Massenot (Contact Author)

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Yuri Pettinicchi

Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA) ( email )

Amalienstrasse 33
Munich, 80799
Germany
+49-89-38602-301 (Phone)

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