The Curve of Inflation Expectations and Firms’ Investments
Name
Perinelli-gperinel-SMMR-Finance-2024 -thesis.pdf
Description
Thesis PDF
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1.48 MB
Format
Adobe PDF
Checksum (MD5)
6e5ec97d4854ae77a7d6a500536b26ac
Author(s)
Perinelli, Giuditta
Advisor(s)
Thesmar, David
Date Issued
September 2024
Publisher
Massachusetts Institute of Technology
Abstract
Using rich survey data on Italian firms, this paper studies the formation mechanisms of inflation expectations at different forecasting horizons. Starting from empirical evidence embedded in firms’ inflation expectation curve, we obtain 3 main findings: (1) firms extrapolate for long forecasting horizons, (2) inflation forecasts overreact (underreact) at long (short) forecasting horizons, (3) long-term inflation expectations impact investment decisions. Specifically, we find that a 1% wedge between the 4-year and 1-year ahead expected inflation is associated with a 0.8% increase in the probability of investing. What motivates this result? After ruling out alternative channels of (1) an increase in expected demand, (2) a decrease in supply of input goods, and (3) an improvement in financing conditions, we claim that a decrease in the perceived cost of capital is the main driver.
MIT Department
Sloan School of Management
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