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Firm expectations and economic activity

Zeno Enders, Franziska Hünnekes and Gernot Müller

No 2621, Working Paper Series from European Central Bank

Abstract: We assess how firm expectations about future production impact current production and pricing decisions. Our analysis is based on a large survey of firms in the German manufacturing sector. To identify the causal effect of expectations, we rely on the timing of survey responses and match firms with the same fundamentals but different views about the future. Firms that expect their production to increase (decrease) in the future are 15 percentage points more (less) likely to raise current production and prices, compared to firms that expect no change in production. In a second step, we show that expectations also matter even if they turn out to be incorrect. Lastly, we aggregate expectation errors across firms and find that they account for about 15 percent of aggregate fluctuations. JEL Classification: E32, D84, E71

Keywords: business cycle; news; noise; propensity score matching; survey data (search for similar items in EconPapers)
Date: 2021-12
New Economics Papers: this item is included in nep-bec, nep-cwa, nep-eur and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Firm Expectations and Economic Activity (2022) Downloads
Working Paper: Firm expectations and economic activity (2019) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20212621

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