Can firms see into the future? Survey evidence from Germany

Baptiste Massenot and Yuri Pettinicchi

No 187, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: This paper presents new evidence on the expectation formation process of firms from a survey of the German manufacturing sector. It focuses on the expectation about their future business conditions, which enters the widely followed economic sentiment index and which is an important determinant of their employment and investment decisions. We find that firms extrapolate their experience too much and make predictable forecasting errors. Moreover, firms do not seem to anticipate the upcoming reversals of business cycle peaks and troughs which causes suboptimal adjustment of investment and employment and affects their inventories and profits. However, the impact on expectation errors decreases with the size and the age of the firm as firms learn to reduce their extrapolation bias over time.

Keywords: Expectation Formation; Expectation Error; Learning; Extrapolation; Experience (search for similar items in EconPapers)
JEL-codes: D90 E70 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-bec and nep-eur
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Journal Article: Can firms see into the future? Survey evidence from Germany (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:187

DOI: 10.2139/ssrn.3071576

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