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Firms’ Price, Cost and Activity Expectations: Evidence from Micro Data

Research output: Contribution to journalArticle

Lena Boneva, James Cloyne, Martin Weale, Tomasz Wieladek

Original languageEnglish
Article numberuez059
JournalEconomic Journal
Early online date27 Nov 2019
DOIs
Publication statusE-pub ahead of print - 27 Nov 2019

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Abstract

Firms’ expectations play a central role in modern macroeconomic models, but little is known empirically about how these are formed or whether they matter for economic outcomes. Using a novel panel data set of manufacturing firms’ expectations about prices and wage rates, new orders, employment and unit costs for the United Kingdom, we document a range of stylized facts about the properties of firms’ expectations and their relationship with recent experience. There is wide dispersion of expectations across firms. Expected future price and wage growth are influenced by firm-specific factors but macroeconomic factors also matter. Expectations of employment and new orders are influenced by firm-specific measures of past orders while expected unit costs seem to be influenced more by firm-specific cost pressures and aggregate import prices. After controlling for a wide range of variables we find a significant connection between past expected price and wage increases and their out-turns. But there is also strong evidence that firms’ expectations are clearly not rational.

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