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No Firm Is an Island? How Industry Conditions Shape Firms’ Expectations

Philippe Andrade (), Olivier Coibion, Erwan Gautier () and Yuriy Gorodnichenko

Working papers from Banque de France

Abstract: We study how firms’ expectations and actions are affected by both aggregate and industry-specific conditions using a survey of French manufacturing firms. We document an important new stylized fact. In response to industry-level shocks that have no aggregate effects, firms’ aggregate expectations respond persistently. This is consistent with “island” models in which firms use the local prices they observe to make inferences about broader aggregate conditions. We then assess the extent to which these patterns are related to observable characteristics of firms and the industries in which they reside. Finally, we extend the analysis to firms’ expectations over their own future price changes and document how these respond to both industry and aggregate variation.

Keywords: Expectations; Rational Inattention. (search for similar items in EconPapers)
JEL-codes: E2 E3 E4 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2020
New Economics Papers: this item is included in nep-mac
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Working Paper: No firm is an island? How industry conditions shape firms’ expectations (2021) Downloads
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