The impact of guidance, short-term dynamics and individual characteristics on firms’ long-term inflation expectations

Abstract

Long-term inflation expectations are an essential element in the transmission of a central bank’s monetary policy. However, it is not fully understood how these long-term inflation expectations behave, as well as whether and how they can be managed. In this paper, we shed light on possible drivers of long-term inflation expectations of firms using information from the Swiss National Bank (SNB) regional network survey. We extended the standard survey with questions to test whether the long-term inflation expectations of firms can be actively influenced by providing information regarding the central bank’s objective, its past performance and long-term average inflation. We find that this type of information, which we call guidance: a) can influence the long-term inflation expectations of firms to a certain extent; and b) surprisingly, it does not have an impact on the uncertainty surrounding the expectations. However, c) uncertainty itself is positively correlated with the level of inflation expectations, and respondents who are more uncertain place greater weight on the information that they receive. Furthermore, d) short-term inflation expectations; e) the individual characteristics of the firms related to prices; and f) a large unexpected shock, in our case, a large shock to the exchange rate, can help to explain the behaviour of long-term inflation expectations.