The Formation of Firms' Inflation Expectations: A Survey Data Analysis

Haruhiko Inatsugu, Tomiyuki Kitamura and Taichi Matsuda
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Haruhiko Inatsugu: Bank of Japan
Tomiyuki Kitamura: Bank of Japan
Taichi Matsuda: Bank of Japan

No 19-E-15, Bank of Japan Working Paper Series from Bank of Japan

Abstract: In this paper, using both semi-aggregate and firm-level survey data of the inflation expectations of Japanese firms, we examine the empirical validity of three hypotheses on the formation of inflation expectations: the full-information rational expectations (FIRE), noisy information, and sticky information hypotheses. Our main findings are as follows. First, the results of our panel VAR analysis using semi-aggregate data show that, while firms' inflation expectations have a forward-looking aspect consistent with FIRE, they are not fully consistent with FIRE in that they tend to incorporate the changes in the actual inflation rate only gradually. Second, the forecast errors of semi-aggregate inflation expectations correlate with the past revisions of expectations, implying that FIRE does not hold for all firms. Third, the results of firm-level dynamic panel regressions show that firms' inflation expectations depend to a great extent on their past expectations, which is consistent with both the noisy information and sticky information hypotheses. The regression results also show that the short-term expectations of small firms are influenced by their perception of their own business conditions, which is consistent with the noisy information hypothesis, especially the rational inattention variant. These findings suggest that firms in Japan form their inflation expectations in a complex manner that cannot be described by a single theory.

Keywords: Firms' inflation expectations; Survey data; FIRE; Noisy information; Sticky information (search for similar items in EconPapers)
JEL-codes: D84 E31 E52 (search for similar items in EconPapers)
Date: 2019-11-22
New Economics Papers: this item is included in nep-mac, nep-mon and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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