New Information and Inflation Expectations among Firms

45 Pages Posted: 23 Apr 2019

See all articles by Serafin Frache

Serafin Frache

Central Bank of Uruguay

Rodrigo Lluberas

Central Bank of Uruguay

Date Written: December 18, 2018

Abstract

Using data from a unique and novel monthly firm-level survey on inflation expectations in Uruguay we first present stylized facts about the inflation expectation formation process and then show how information acquisition affects firms' inflation expectations. We show that firms' forecasts are close to observed inflation, that a sizable proportion of firms do not revise their expectations, and that there is substantial disagreement about future inflation among firms. We also present evidence on industrial sector effects on inflation forecasts and show that the correlation between inflation expectations and cost expectations increases with the forecast time horizon. We then exploit peculiarities of the collective wage bargaining negotiation mechanism to estimate the impact of acquiring information about past inflation on expected future inflation. Our results imply that firms that adjust wages expect lower inflation, revise their expectations downwards and make smaller forecast errors than firms that do not adjust wages. We find no effect of wage adjustments on firms' own cost expectations and that disagreement among firms is lower in the months of wage adjustment. The latter suggests that inflation expectations tend to converge as firms are more informed about past inflation.

Keywords: Inflation Expectations, Firms' Survey, New Information

JEL Classification: D22, D84, E31

Suggested Citation

Frache, Serafin and Lluberas, Rodrigo, New Information and Inflation Expectations among Firms (December 18, 2018). BIS Working Paper No. 781. Available at SSRN: https://ssrn.com/abstract=3374639

Serafin Frache (Contact Author)

Central Bank of Uruguay ( email )

Diagonal Fabini 777
Montevideo, CP 11100
Uruguay

Rodrigo Lluberas

Central Bank of Uruguay ( email )

Diagonal Fabini 777
Montevideo, CP 11100
Uruguay

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