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  3. 2025
  4. Preliminary Program
  5. Firms’ Inflation Expectations: New Evidence and Policy Implications
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Firms’ Inflation Expectations: New Evidence and Policy Implications

Paper Session

Friday, Jan. 3, 2025 2:30 PM - 4:30 PM (PST)

Parc 55
Hosted By: American Economic Association
  • Chair: Yuriy Gorodnichenko, University of California-Berkeley

Why Do Workers and Managers Have Different Takes on Inflation?

Francesco D'Acunto
,
Georgetown University
Saten Kumar
,
Aukland University of Technology
Michael Weber
,
University of Chicago

Abstract

We field customized surveys on firm managers and workers from the same firms to elicit firms’ and workers’ mental models of how inflation affects the macroeconomy and their own financial situation. We construct mental models both using closed-form elicitations for mental models but also using open-ended elicitations. For identification, we exploit vignettes about hypothetical changes in interest rates and surveys around actual changes in policy interest rates. Higher hypothetical and higher than expected interest rates on average increase firms’ unemployment and inflation expectations and lowers their forecasts for hiring and investment and lower ex-post actual workforce and capital expenditure. The average effects, however, camouflage substantial heterogeneity across firms depending on their mental models. Similar heterogeneity is present among workers but workers on average have a stronger stagflationary view of expected inflation. Higher inflation expectations for workers trigger a positive labor supply response.

Mining the Gap: Extracting Firms’ Inflation Expectations from Earnings Calls

Silvia Albrizio
,
International Monetary Fund
Allan Dizioli
,
International Monetary Fund
Pedro Vitale Simon
,
University of Illinois Urbana-Champaign

Abstract

Using a novel approach involving natural language processing (NLP) algorithms, we construct a new cross-country index of firms' inflation expectations from earnings call transcripts. Our index has a high correlation with existing survey-based measures of firms' inflation expectations, it is robust to external validation tests and is built using a new method that outperforms other NLP algorithms. In an application of our index to United States, we uncover some facts related to firm's inflation expectations. We show that higher expected inflation translates into future inflation. Going into the firms level dimension of our index, we show departures from a rational framework in firms' inflation expectations and that firms' attention to the central enhances monetary policy effectiveness.

Inflation and Wage Expectations of Firms and Employees

Lukas Buchheim
,
Technical University Dortmund and CESifo
Sebastian Link
,
ifo Institute, Ludwig Maximilian University of Munich, CESifo and IZA
Sascha Möhrle
,
ifo Institute and Ludwig Maximilian University of Munich

Abstract

We study the link between inflation and wage expectations (pass-through) using new and extensive panel data of German firms and employees. We find that pass-through from inflation expectations to expected wage growth is small and amounts to between 10 and 20 percent for firms and between 0 and 7 percent for employees. We use panel variation in the industry-specific coverage length of collective agreements to estimate pass-through at the intensive margin, which is 1.3 to 2 times larger than average pass-through. For the extensive margin of wage setting we find a small effect of inflation expectations on initiating wage bargaining—within the worker-firm match or via on-the-job search—in the cross-sectional dimension of the data only. These findings are consistent with wage rigidities playing an important role for the muted response of wage inflation to expected inflation. Our findings are also informative for a recent theoretical literature that explores mechanisms for pass-through either in wage posting (Lorenzoni and Werning, 2023; Werning, 2022) or wage bargaining frameworks (Bloesch et al., 2023; Pilossoph and Ryngaert, 2022).

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

Ursel Baumann
,
European Central Bank
Annalisa Ferrando
,
European Central Bank
Dimitris Georgarakos
,
European Central Bank
Yuriy Gorodnichenko
,
University of California-Berkeley
Timo Reinelt
,
European Central Bank

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 and related actions in response to information treatments about current or future inflation.

Discussant(s)
Jane Ryngaert
,
University of Notre Dame
Miguel Acosta
,
University of Wisconsin-Madison
Ina Hajdini
,
Federal Reserve Bank of Cleveland
Philippe Andrade
,
Federal Reserve Bank of Boston
JEL Classifications
  • E3 - Prices, Business Fluctuations, and Cycles
  • E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit