Comments on “How do firms form their
expectations? New survey evidence” by
Coibion, Gorodnichenko, and Kumar
Inflation, Monetary Policy, and the Public. Federal Reserve Bank of Cleveland, May
29, 2014, Jamie McAndrews*
*The views expressed are my own and do not necessarily represent the views of the FRBNY
or the Federal Reserve System.
Summary
• Paper conducts survey of ~3,100 small and medium-sized
businesses in New Zealand (between September 2013 and
January 2014) with one follow-up survey (~700 firms, between
February and April 2014)
• Main findings: survey responses of business managers much
more similar to those of consumers than those of professional
forecasters: upward bias in inflation perceptions and expectations,
and large dispersion/disagreement in beliefs across respondents.
• Conclusion: Strong evidence of informational frictions,
consistent with rational inattention motives.
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Why is this important?
 Previous research on disaggregated prices (Boivin, Giannoni,
Mihov AER 2009; Mackowiak, Moench, Wiederholt JME 2009)
has documented slow, persistent response of sectoral prices to
aggregate (e.g. monetary) shocks and fast, non-persistent
response to sector-specific shocks
 Implies slow transmission of monetary policy shocks to
aggregate price level
 MMW: This can be explained with rational inattention models,
difficult to explain with other models of price setting (e.g. Calvo)
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Is it really inattention?
Unclear why inattention should imply high, extreme answers to
survey questions.
 Maybe it reflects numeracy/financial literacy skills.
 Maybe respondents use a different measure for overall
inflation.
 Are results driven by outliers due to measurement or reporting
errors?
 Point forecasts may not equal expected values.
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Any other evidence of learning or updating?
 Armantier et al (2014) shows individuals update after receiving
new information
 Evidence from SCE that asking about inflation and other
concepts leads to some learning, with extreme responses
occurring less frequently and people indicating more familiarity
with inflation as they participate in additional waves of the
survey.
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Outliers decline with Tenure:
Tenure vs. Outliers (Average %) (Topa and Bleemer)
One Year Inflation Point Predictions
Three Year Inflation Point Predictions
T-test of equality, tenures 1 vs. 2: p=0.0003
T-test of equality, tenures 3 vs. 4: p=0.0293
T-test of equality, tenures 4 vs. 5: p=0.1378
T-test of equality, tenures 1 vs. 2: p=0.0470
T-test of equality, tenures 3 vs. 4: p=0.3923
T-test of equality, tenures 4 vs. 5: p=0.3162
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Forecast uncertainty declines with Tenure:
Tenure vs. Forecast Uncertainty (Topa and Bleemer)
One Year Inflation
Three Year Inflation
T-test of equality, tenures 1 vs. 2: p=0.0002
T-test of equality, tenures 4 vs. 5: p=0.2654
T-test of equality, tenures 5 vs. 6: p=0.1937
T-test of equality, tenures 1 vs. 2: p=0.0000
T-test of equality, tenures 4 vs. 5: p=0.0816
T-test of equality, tenures 5 vs. 6: p=0.2326
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Implications for Macro modeling
 In previous work, Coibion & Gorodnichenko (2011,2012) have
documented that survey responses from households and
professional forecasters are consistent with imperfect
(noisy/sticky) information models; Andrade, Crump , Eusepi,
Moench (2014) show complementary results.
 This paper: firms disagree much more about aggregate
conditions than professional forecasters or even households.
Does this imply levels of information imperfection that would
generate implausibly large aggregate persistence in general
equilibrium?
 More precisely, can one calibrate rational inattention models of
Mackowiak&Wiederholt (2009, 2012) to your survey data and
see what this would imply about inflation persistence?
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Other implications
 Whether firms’ inflation expectations are well anchored is
relevant only if firms act on their reported beliefs. Note the low
rate of inflation in NZ for a long time.
 In terms of unanchoring of expectations, finding high
expectations for some respondents may not be of great
concern. Assuming that the proportion of respondents providing
extreme responses is relatively stable over time, to identify
evidence of possible unanchoring, the focus should be more
focused on changes in expectations over time.
 If the inflation rate is low, fewer price changes will be made by
firms, so they could become inattentive to inflation, unanchoring
expectations. For example, if inflation were higher it would be
more salient to people and firms, and agents would pay more
attention, increasing the precision of their forecasts.
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