How Firms Form Beliefs and the Implications for Inflation

Robert Minton and Hugo Monnery
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Robert Minton: https://www.federalreserve.gov/econres/robert-j-minton.htm

No 2026-053, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Using survey data from U.S. firms, we study the primitive beliefs for pricesetting: firms’ forecasts of their own marginal costs. These forecasts are disconnected from CPI expectations, (over)react to current and past costs systematically, and underreact to aggregate shocks until costs move. We show that under empirically realistic cost beliefs the New Keynesian Phillips curve is steeper and less forward-looking. Supply shocks are more inflationary because they hit costs quickly. Demand shocks are less inflationary because firms fail to anticipate future wage pressure. Forward guidance weakens at long horizons but strengthens in the near term.

Pages: 83 p.
Date: 2026-07-31
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:103588

DOI: 10.17016/FEDS.2026.053

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