Monetary Policy, Firms’ Inflation Expectations and Prices: Causal Evidence from Firm-Level Data

Abstract

We empirically explore the direct and immediate response of firms’ inflation expectations to monetary policy shocks. We use the Bank of Italy’s quarterly Survey of Inflation and Growth Expectations, in operations since 2000, and compare average point inflation expectations of firms interviewed in the days following scheduled ECB Governing Council meetings with those of firms interviewed just before them; we then relate the difference we find to the change in the nominal market interest rates recorded on Governing Council meeting days, a gauge of the unanticipated component of monetary policy communications. We find that unanticipated changes in market rates are negatively correlated in a statistically significant way with the differences in inflation expectations between the two groups of firms and that this effect has become stronger since 2009. We do not find evidence that firms’ pricing plans are affected by these monetary policy shocks nor that firms perceive significant changes in the main determinants of their pricing choices.