Uncertainty, imperfect information, and expectation formation over the firm’s life cycle

Cheng Chen, Tatsuro Senga, Chang Sun and Hongyong Zhang

Journal of Monetary Economics, 2023, vol. 140, issue C, 60-77

Abstract: Using a long panel data set on Japanese firms, we find that firms make more precise forecasts and less autocorrelated forecast errors as they gain more experience. Then, we build a firm dynamics model where firms gradually learn about their demand by using a noisy signal. Using expectations data over time, we cleanly isolate the learning mechanism from other mechanisms and find that it accounts for 20%–40% of the overall decline in forecast errors over the life cycle. Productivity gains from removing information frictions range from 3% to 12%, with firm entry and exit playing prominent roles.

Keywords: Firm expectations; Forecast errors; Learning; Life cycles; Productivity (search for similar items in EconPapers)
JEL-codes: D83 D84 E22 E23 F23 L2 (search for similar items in EconPapers)
Date: 2023
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Related works:
Working Paper: Uncertainty, Imperfect Information, and Expectation Formation over the Firm's Life Cycle (2020)
Working Paper: Uncertainty, Imperfect Information, and Expectation Formation over the Firm's Life Cycle (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:140:y:2023:i:c:p:60-77

DOI: 10.1016/j.jmoneco.2023.08.001

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