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Firm Expectations and News: Micro v Macro

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  • Born, Benjamin
  • Enders, Zeno
  • Menkhoff, Manuel
  • Müller, Gernot
  • Niemann, Knut

Abstract

Firm expectations reflect micro and macro news: information about firm-level developments and the aggregate economy. We formalize this notion in a stylized general-equilibrium model where firms face a signal-extraction problem and study the implications of ‘island illusion,’ meaning that firms systematically underestimate the importance of aggregate developments for their own performance. Island illusion is governed by a single parameter that captures the departure from rational expectations. It imposes joint restrictions on the impact of micro and macro news that we confront with survey data for Italian and German firms. While both surveys differ along many dimensions, we find robustly that firms’ expectations about their own prices and output overreact to micro news and underreact to macro news—just like the model predicts for island illusion. Moreover, also consistent with the model, we find the extent of overreaction and underreaction to co-move positively, both over time and across firms.

Suggested Citation

  • Born, Benjamin & Enders, Zeno & Menkhoff, Manuel & Müller, Gernot & Niemann, Knut, 2022. "Firm Expectations and News: Micro v Macro," CEPR Discussion Papers 17768, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17768
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    Cited by:

    1. Dovern, Jonas & Müller, Lena Sophia & Wohlrabe, Klaus, 2023. "Local information and firm expectations about aggregates," Journal of Monetary Economics, Elsevier, vol. 138(C), pages 1-13.
    2. Robert Lehmann, 2023. "The Forecasting Power of the ifo Business Survey," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 19(1), pages 43-94, March.
    3. Balleer, Almut & Noeller, Marvin, 2023. "Monetary policy in the presence of supply constraints: Evidence from German firm-level data," Ruhr Economic Papers 1060, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    4. Almut Balleer & Marvin Noeller, 2023. "Monetary Policy in the Presence of Supply Constraints: Evidence from German Firm-Level Data," CESifo Working Paper Series 10261, CESifo.
    5. Francesco Bianchi & Cosmin Ilut & Hikaru Saijo, 2024. "Smooth Diagnostic Expectations," ISER Discussion Paper 1249, Institute of Social and Economic Research, Osaka University.
    6. Nöller, Marvin & Balleer, Almut, 2023. "Monetary Policy in the Presence of Supply Constraints: Evidence from German Firm-level Data," VfS Annual Conference 2023 (Regensburg): Growth and the "sociale Frage" 277638, Verein für Socialpolitik / German Economic Association.
    7. Daria Minina & Gabriele Galati & Richhild Moessner & Maarten van Rooij, 2024. "The effect of information on consumer inflation expectations," Working Papers 810, DNB.
    8. Zaremba, Adam & Cakici, Nusret & Bianchi, Robert J. & Long, Huaigang, 2023. "Interest rate changes and the cross-section of global equity returns," Journal of Economic Dynamics and Control, Elsevier, vol. 147(C).

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    More about this item

    Keywords

    overreaction; underreaction; micro news; macro news; island illusion; Salience; Inflation; Business cycle; Survey data;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy

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