Do Firms Act on Their Inflation Expectations? Another Look at Italian Firms

Alfonso Rosolia

Journal of Political Economy Macroeconomics, 2024, vol. 2, issue 4, 651 - 686

Abstract: I estimate the effect of expected inflation on firms’ pricing and labor demand decisions leveraging the exogenous variation generated by an information provision experiment included since 2012 in a Bank of Italy quarterly firm survey. I consider several estimators for the causal effect of interest that are consistent with the nonmonotonic revision pattern generated by the experiment and the possibility that firms’ decisions are nonlinearly related to expected inflation, two features that prevent a causal interpretation of conventional instrumental variable estimates. Across methods and samples, I consistently fail to find evidence of an economically and statistically significant effect of inflation expectations on outcomes.

Date: 2024
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