Quasi-Experiment in Monetary Policy: The Impact of 2021 Rate Cut on Inflation Expectations and Firm Behavior

Abstract

This paper leverages a rare quasi-experiment-the unexpected September 2021 interest rate cut by the Central Bank of the Republic of Türkiye-to examine how inflation expectations shape firm behavior in a high-inflation environment. Drawing on a rich dataset that combines monthly survey responses with administrative records, we exploit the heterogeneous revisions in firms' inflation expectations triggered by the policy shock. Firms that significantly increased their inflation forecasts (treated) subsequently became more pessimistic about economic conditions, reduced employment, and curbed domestic sales. At the same time, they strategically raised procurement, acquired more foreign currency assets, and boosted borrowing in local currency-even at higher costs-in anticipation of debt erosion. These patterns suggest that firms' heightened inflation expectations drive both defensive and opportunistic behaviors, ranging from hedging against currency depreciation to locking in lower financing costs. Overall, the findings highlight the critical role of inflation expectations in guiding firm-level decisions and underscore the importance of policy credibility in volatile macroeconomic settings.

Keywords: Expectations, Firms, RCT, High Inflation

JEL Classification: E12, E24, E52