Firm Expectations and News: Micro v Macro

Benjamin Born, Zeno Enders, Manuel Menkhoff, Müller, Gernot and Knut Niemann
Authors registered in the RePEc Author Service: Gernot J. Müller

No 17768, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: To shed light on the expectation formation of firms, we use firm-level data and examine how expectations adjust to news. We classify news as either micro (firm-specific developments) or macro (information about the aggregate economy). Analyzing survey data from Italian and German firms, we consistently find that expectations overreact to micro news but underreact to macro news. Our empirical specification is based on a stylized model of `island illusion,' because of which firms systematically underestimate the importance of aggregate developments for their own performance. This illusion has aggregate implications, which we derive by embedding it into the canonical noisy-information model.

Keywords: overreaction; underreaction; micro news; macro news; island illusion; Inflation; Business cycle; Survey data (search for similar items in EconPapers)
JEL-codes: C53 D84 E71 (search for similar items in EconPapers)
Date: 2022-12
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Related works:
Working Paper: Firm Expectations and News: Micro v Macro (2023)
Working Paper: Firm expectations and news: Micro v macro (2023)
Working Paper: Firm Expectations and News: Micro v Macro (2022)
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