Beliefs That Move the Economy: Shocks to Firms’ and Households’ Inflation Expectations

Paweł Galiński

No 2026-120, KAE Working Papers from Warsaw School of Economics, Collegium of Economic Analysis

Abstract: This paper examines shocks to inflation expectations and argues that distinguishing between households’ and firms’ expectations is crucial for understanding their macroeconomic role. First, using an analytical example, I demonstrate that shocks to firms’ expectations are stagflationary, whereas shocks to households’ expectations are expansionary. Second, household expectations are found to be more exposed to expectation shocks than those of firms. Third, shocks to firms' inflation expectations are a key driver of output, inflation, and real wages, while shocks to households' expectations contribute primarily to wage dynamics. These results imply that monetary policy should place greater weight on firms’ expectations than on those of households.

Keywords: Inflation expectation shocks; firms' expectations; households' expectations; wage setting; behavioral macroeconomics (search for similar items in EconPapers)
JEL-codes: D84 E24 E31 E32 E52 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2026-02
New Economics Papers: this item is included in nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:sgh:kaewps:2026120

DOI: 10.33119/kaewps2026120

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