Firm Expectations and News: Micro v Macro

Arbeitspapier

Using firm-level data, we study how firm expectations adjust to news while accounting for a) the heterogeneity of news and b) the heterogeneity of firms. We classify news as either micro or macro, that is, information about firm-specific developments or information about the aggregate economy. Survey data for German and Italian firms allows us to reject rational expectations: Both types of news predict forecast errors at the firm level. Yet while firm expectations overreact to micro news, they underreact to macro news. We propose a general-equilibrium model where firms suffer from 'island illusion' to explain these patterns in the data.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ifo Working Paper ; No. 400

Classification and Topics

• Classification: Wirtschaft ; Expectations; Speculations ; Forecasting Models; Simulation Methods ; Macro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy‡
• Subject: Survey data ; salience ; overreaction ; underreaction ; micro news ; macro news ; island illusion ; business cycle

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Born, Benjamin ; Enders, Zeno ; Menkhoff, Manuel ; Müller, Gernot J. ; Niemann, Knut
• Event: Veröffentlichung
• (who): ifo Institute - Leibniz Institute for Economic Research at the University of Munich
• (where): Munich
• (when): 2023

Further information

• Handle: http://hdl.handle.net/10419/275757
• Last update: 10.03.2025, 11:43 AM CET