No firm is an island? How industry conditions shape firms’ expectations

Philippe Andrade · Olivier Coibion · Erwan Gautier · Yuriy Gorodnichenko

91 citations0/0 files storedJournal of Monetary Economics

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Monetary Policy and Economic Impact Consumer Market Behavior and Pricing Economic theories and models

Abstract

Using a survey of French manufacturing firms, we study how firms’ expectations and actions are affected by both aggregate and industry-specific conditions. 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. These patterns are related to observable characteristics of firms and the industries in which they reside. Finally, we extend the analysis to firms’ expectations over their own future price changes and document how these respond to both industry and aggregate variation.

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References

2005Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy 1972Expectations and the neutrality of money 2004Some Evidence on the Importance of Sticky Prices 2011The Granular Origins of Aggregate Fluctuations 2002Some Evidence on the Importance of Sticky Prices 2015Information Rigidity and the Expectations Formation Process: A Simple Framework and New Facts 2009Optimal Sticky Prices under Rational Inattention 2012What Can Survey Forecasts Tell Us about Information Rigidities?

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