No Firm is an Island? How Industry Conditions Shape Firms’ Expectations

49 Pages Posted: 4 Jan 2021

See all articles by Erwan Gautier

Erwan Gautier

Banque de France

Philippe Andrade

Federal Reserve Banks - Federal Reserve Bank of Boston

Olivier Coibion

University of Texas at Austin

Yuriy Gorodnichenko

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August, 2020

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 an important new stylized fact. In response to industry-level shocks that have no aggregate effects, firms’ aggregate expectations respond persistently. This is consistent with “island” models in which firms use the local prices they observe to make inferences about broader aggregate conditions. We then assess the extent to which these patterns are related to observable characteristics of firms and the industries in which they reside. Finally, we extend the analysis to firms’ expectations of their own future price changes and document how these respond to both industry and aggregate variation.

Keywords: expectations, rational inattention

JEL Classification: E2, E3, E4

Suggested Citation

Gautier, Erwan and Andrade, Philippe and Coibion, Olivier and Gorodnichenko, Yuriy, No Firm is an Island? How Industry Conditions Shape Firms’ Expectations (August, 2020). FRB of Boston Working Paper No. 20-17, Available at SSRN: https://ssrn.com/abstract=3758292 or http://dx.doi.org/10.29412/bosfrb.wp.2020.17

Erwan Gautier (Contact Author)

Banque de France ( email )

Paris
France

Philippe Andrade

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

Olivier Coibion

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

Yuriy Gorodnichenko

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

HOME PAGE: http://www.econ.berkeley.edu/~ygorodni/index.htm

National Bureau of Economic Research (NBER)

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IZA Institute of Labor Economics

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Germany

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