Safe to Update Inflation Expectations? New Survey Evidence on Euro Area Firms

67 Pages Posted: 29 May 2024

See all articles by Ursel Baumann

Ursel Baumann

European Central Bank (ECB)

Annalisa Ferrando

European Central Bank (ECB)

Dimitris Georgarakos

European Central Bank (ECB) - Directorate General Research; Center for Financial Studies (CFS)

Yuriy Gorodnichenko

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

Timo Reinelt

European Central Bank (ECB)

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Abstract

This paper provides new survey evidence on firms' inflation expectations in the euro area. Building on the ECB's Survey on the Access to Finance of Enterprises (SAFE), we introduce consistent measurement of inflation expectations across countries and shed new light on the properties and causal effects of these expectations. We find considerable heterogeneity in firms' inflation expectations and show that firms disagree about future inflation more than professional forecasters but less than households. We document that differences in firms' demographics, firms' choices and constraints, and cross-country macroeconomic environments account for most of the variation in inflation expectations by roughly equal shares. Using an RCT approach, we show that firms update their inflation expectations in a Bayesian manner. Moreover, they revise their plans regarding prices, wages, costs and employment in response to information treatments about current or future inflation.

Keywords: inflation expectations, firm decisions, price setting, surveys, randomised controlled trial

JEL Classification: E20, E31, E52

Suggested Citation

Baumann, Ursel and Ferrando, Annalisa and Georgarakos, Dimitris and Gorodnichenko, Yuriy and Reinelt, Timo, Safe to Update Inflation Expectations? New Survey Evidence on Euro Area Firms. IZA Discussion Paper No. 17015, Available at SSRN: https://ssrn.com/abstract=4844522 or http://dx.doi.org/10.2139/ssrn.4844522

Ursel Baumann (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 20
Frankfurt am Main, D-60311
Germany

Annalisa Ferrando

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Dimitris Georgarakos

European Central Bank (ECB) - Directorate General Research ( email )

Sonnemannstrasse 20
Frankfurt am Main, 60314
Germany

Center for Financial Studies (CFS) ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

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) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Timo Reinelt

European Central Bank (ECB) ( email )

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