Firms’ Expectations and Monetary Policy Shocks in the Eurozone

Snezana Eminidou and Marios Zachariadis

University of Cyprus Working Papers in Economics from University of Cyprus Department of Economics

Abstract: The purpose of this paper is to investigate the impact of monetary policy shocks on firms’ selling price and production expectations. We estimate a panel structural vector autoregressive (SVAR) model for 10 euro-area economies using monthly survey data for the period from 1999:1 to 2018:6. To identify the monetary policy shocks, we use narrative and high frequency instruments taking into account the central bank’s announcements regarding its policy decisions. The impulse responses from a panel SVAR analysis indicate that firms typically revise their expectations in a manner consistent with imperfect information theoretical settings, e.g., increasing their production and selling price expectations after an unanticipated interest rate hike. Interestingly, we observe an overshooting pattern where following the initial surprise that leads imperfectly informed firms to raise (reduce) their production and selling expectations after an unanticipated interest rate hike (M1 expansion), firms gradually come to expect contractionary (expansionary) monetary policy shocks to eventually decrease (increase) production and then inflation, thus revise their expectations accordingly by decreasing (increasing) first their production expectations and then their selling price expectations in accordance with this learning experience over time.

Keywords: Rational inattention; imperfect information; survey data; SVAR; narrative shocks; interest rate shock; divisia index (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2019-02
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ucy:cypeua:02-2019

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