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Firms’ inflation expectations and investment plans

Adriana Grasso and Tiziano Ropele ()

No 1203, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: In past years there have been suggestions for monetary policy to engineer higher inflation expectations to stimulate spending. We examine the relationship between the inflation expectations of firms and their investment plans using Italian business survey data over the period 2012-2016. We show that higher expected inflation is positively correlated with firms’ willingness to invest. In our baseline specification, a one percentage point rise in expected inflation is associated with a higher probability of reporting higher investment plans by 4.0 percentage points. This expansionary effect operates through the standard interest rate channel and its magnitude is positively correlated with firms’ liquidity and debt position.

Keywords: investment expenditure; inflation expectations; survey data (search for similar items in EconPapers)
JEL-codes: E22 E31 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-mac and nep-mon
Date: 2018-12
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1203_18

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