Inflation Expectations and Firms' Decisions in High Inflation: Evidence from a Randomized Control Trial

Okan Akarsu, Emrehan Aktug and Huzeyfe Torun

Working Papers from Research and Monetary Policy Department, Central Bank of the Republic of Turkey

Abstract: We conducted a survey of Turkish firms, using randomized treatments to provide varied information about inflation in a high-inflation environment. By matching the survey data with administrative firm-level data on employment, sales, credit, and foreign exchange transactions, we explore the impact of exogenous variations in inflation expectations on firms’ behavior, borrowing decisions, and expectations. Our findings are summarized in seven facts: (i) information treatments are effective at generating exogenous variation in inflation expectations, even when inflation is high; (ii) the pass-through to firms’ own price, wage, and cost expectations is strong, reaching up to 60%; (iii) firms adopt a supply-side interpretation of inflation—lower inflation expectations make them more optimistic; (iv) firms with lower inflation expectations decrease credit demand by approximately 3% for a 1 percentage point decline in expected inflation, shifting from long-term to short-term loans to avoid higher perceived costs; (v) they dollarize their liabilities by increasing their share of FX-denominated debt; (vi) they de-dollarize their assets by decreasing their net foreign currency holdings; and (vii) they increase their real activity, leading to higher employment and sales, and lower inventory.

Keywords: Expectations; Firms; RCT; High inflation; Macroeconomics (search for similar items in EconPapers)
JEL-codes: E12 E24 E31 E52 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-ara, nep-inv and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:tcb:wpaper:2512

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