Inflation Expectations and Firms’ Decisions in High Inflation: Evidence from a Randomized Control Trial

General publicly available information on inflation forecasts

We provide publicly available information regarding inflation expectations. The information RCT is designed to influence firms' inflation expectations by delivering targeted information. Each group in the sample is randomly given a publicly available piece of data regarding professional forecasts of inflation, the CBRT's forecasts for 2024 and 2025, or the CBRT's inflation target. Each group consists of approximately 250 observations. Questions about price and wage changes over the past 12 months are asked before the treatment, while all other questions are asked post-treatment. Each group receives one of the following statements:

Treatment 1: "According to the results of the Market Participants Survey for May 2024: The participants' expectation for the Consumer Price Index (CPI) 12 months from now is 33.21\%. In other words, professionals expect general prices to increase by 33.21\% over the next 12 months."

Treatment 2: "According to the Central Bank of the Republic of Turkey's Inflation Report for May 2024: The Central Bank predicts that annual inflation will be 38\% by the end of 2024. In other words, the Central Bank expects general prices to increase by 38\% in 2024."

Treatment 3: "According to the Central Bank of the Republic of Turkey's Inflation Report for May 2024: The Central Bank predicts that annual inflation will be 14\% by the end of 2025. In other words, the Central Bank expects general prices to increase by 14\% in 2025."

Treatment 4: "Within the framework of the inflation targeting regime, the Central Bank's inflation target is 5\%. In other words, the Central Bank aims for the general price level to rise by approximately 5\% annually in the medium term."

2024-05-15

2024-05-25

Firms' Borrowing Decisions

Firms' Expectations regarding wages, unit costs and prices

We implement a survey of Turkish firms in which random subsets of respondents receive information about publicly available inflation expectations. The resulting exogenously generated variation in inflation expectations is used to assess how expectations affect decisions and expectations of firms' managers relative to those in a control group.

We implement a survey of Turkish firms in which random subsets of respondents receive information about publicly available inflation expectations. The resulting exogenously generated variation in inflation expectations is used to assess how expectations affect decisions and expectations of firms' managers relative to those in a control group.

After providing information to each treatment group (with the control group receiving none), respondents were asked several follow-up questions. These included their quantitative expectations for aggregate inflation, producer price inflation, salary growth, unit cost growth, employment changes, price growth of the firm's main product, and both domestic and export sales. The post-treatment questions enable us to assess the impact of the treatments on firms' expectations, alongside real variables collected from matched datasets in the subsequent months.

Randomization by computer.

Individual (firm managers)

No

~1200 individuals

~1200 individuals

240

We implement a survey of Dutch households in which random subsets of respondents receive information about inflation. The resulting exogenously generated variation in inflation expectations is used to assess how expectations affect consumption decisions. The causal effects of reduced inflation expectations on nondurable spending are imprecisely estimated, but there is a sharp positive effect on durable spending. This is likely driven by the fact that Dutch households seem to become more optimistic about their real income and aggregate spending when they decrease their inflation expectations. We find little role for cognitive or financial constraints in explaining spending responses.

Coibion, Olivier, Dimitris Georgarakos, Yuriy Gorodnichenko, and Maarten van Rooij. 2023. "How Does Consumption Respond to News about Inflation? Field Evidence from a Randomized Control Trial." American Economic Journal: Macroeconomics, 15 (3): 109–52.

https://www.aeaweb.org/articles?id=10.1257/mac.20200445

We use randomized treatments that provide different types of information about the first and/or second moments of future economic growth to generate exogenous changes in the perceived macroeconomic uncertainty of treated households. The effects on their spending decisions relative to an untreated control group are measured in follow-up surveys. Our results indicate that, after taking into account first moments, higher macroeconomic uncertainty induces households to significantly and persistently reduce their total monthly spending in subsequent months. Changes in spending are broad based across spending categories and apply to larger durable good purchases as well.

Coibion, Olivier, Dimitris Georgarakos, Yuriy Gorodnichenko, Geoff Kenny, and Michael Weber. 2024. "The Effect of Macroeconomic Uncertainty on Household Spending." American Economic Review, 114 (3): 645–77.

https://www.aeaweb.org/articles?id=10.1257/aer.20221167&from=f

We survey New Zealand firms and document novel facts about their macroeconomic beliefs. There is widespread dispersion in beliefs about past and future macroeconomic conditions, especially inflation. This dispersion in beliefs is consistent with firms' incentives to collect and process information. Using experimental methods, we find that firms update their beliefs in a Bayesian manner when presented with new information about the economy and that changes in their beliefs affect their decisions. Inflation is not generally perceived as being important to business decisions so firms devote few resources to collecting and processing information about inflation.

Coibion, Olivier, Yuriy Gorodnichenko, and Saten Kumar. 2018. "How Do Firms Form Their Expectations? New Survey Evidence." American Economic Review, 108 (9): 2671–2713.

https://www.aeaweb.org/articles?id=10.1257/aer.20151299

We conducted a survey of Turkish firms, using randomized treatments to provide varied information about inflation in a high-inflation environment. By matching the survey data with detailed firm-level data on exports, employment, credit, and foreign exchange transactions, we explore the impact of exogenous variations in inflation expectations on firms' behavior, borrowing decisions, and expectations. Our findings reveal three key insights. First, inflation expectations significantly impact firms' expected prices, wages, and unit costs, with pass-through rates reaching as high as 60% in a high-inflation environment—demonstrating a much stronger connection compared to low-inflation settings. Second, firms with heightened inflation expectations substantially increase their credit demand, shifting from short-term to long-term loans through the refinancing channel, with a significantly reduced cost. Specifically, a 10 percentage point increase in inflation expectations leads to a 3 percentage point rise in credit usage, accompanied by a 3 percentage point decline in borrowing costs. Additionally, firms with elevated inflation expectations are more likely to raise their foreign currency purchases while decreasing the share of FX-denominated credit on their liability side. Third, firms facing higher inflation expectations tend to reduce employment and sales, reflecting a stagflationary outlook. Despite the negative impact on sales and employment, total credit usage increases, driven by long-term borrowing as firms seek to lock in lower long-term rates in anticipation of further inflation, highlighting the importance of the refinancing channel.

Aktug, Emrehan and Torun, Huzeyfe and Akarsu, Okan, Inflation Expectations and Firms' Decisions in High Inflation: Evidence from a Randomized Control Trial (October 01, 2024). Available at SSRN: https://ssrn.com/abstract=5008981 or http://dx.doi.org/10.2139/ssrn.5008981

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5008981