In this work we use data from the Bank of Italy's Survey on Inflation and Growth Expectations, whose reference universe consists of firms with at least 50 employees, to assess to what extent firms' inflation expectations affect their economic decisions (selling prices, labor demand and credit utilization). The estimation period runs from the third quarter of 2012 to the first quarter of 2018.
We document that firms that expect higher inflation raise their prices more and make greater use of credit lines but, conversely, reduce their employment, plausibly because they perceive the expected increase in inflation as driven by negative supply-side shocks. In the period in which the official interest rates have remained at their lower bound (since the fourth quarter of 2014), the effects of higher inflation expectations on prices and credit demand have been stronger while those on employment have turned positive.
Published in 2020 in: Quarterly Journal of Economics, v. 135, 1, pp. 165-219
