Elsevier

Journal of Monetary Economics

Volume 125, January 2022, Pages 40-56
Journal of Monetary Economics

No firm is an island? How industry conditions shape firms’ expectations☆

https://doi.org/10.1016/j.jmoneco.2021.05.006Get rights and content
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Highlights

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    Conditions in a firm's industry shape their view of macroeconomy.

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    Evidence consistent with “island” models such as Lucas (1972).

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    Evidence inconsistent with full-information macroeconomic models.

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    Evidence consistent with pervasive information rigidities.

Abstract

Using a survey of French manufacturing firms, we study how firms’ expectations and actions are affected by both aggregate and industry-specific conditions. 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. 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.

JEL

E2
E3
E4

Keywords

Expectations
Rational inattention
Inflation

Cited by (0)

☆

We are grateful to Mark Bils, an anonymous referee, and our discussants Isabelle Salle and Mirko Wiederholt for very helpful comments as well as George-Marios Angeletos, James Bullard, Gianluca Violante, and conference participants at the Banque de France conference on Heterogeneity in Macroeconomics for suggestions and at the Carnegie-Rochester-NYU 2021 conference. We also thank seminar participants at Berkeley and the Federal Reserve Bank of Cleveland. We thank Sylvie Tarrieu for excellent research assistance. We are also grateful to INSEE for providing the access to the micro data and to the CASD (Centre d'Accès Sécurisé Distant) for the distant data access. This work is supported by a public grant overseen by the French National Research Agency (ANR) as part of the “Investissements d'Avenir” program (reference: ANR-10-EQPX-17 – CASD). Coibion and Gorodnichenko thank NSF (SES #1530467) for financial support. The views expressed in this paper are those of the authors and do not necessarily represent those of the Federal Reserve Bank of Boston, the Federal Reserve System, the Banque de France or the Eurosystem.

© 2021 The Author(s). Published by Elsevier B.V.