Working Paper
Firms’ Inflation Expectations in a Monetary Union
Abstract: Using data from the euro area SAFE, a novel survey of firms’ inflation expectations including a randomized controlled trial (RCT), we show that firms’ inflation expectations exhibit significant heterogeneity, challenging the predictions of full-information rational expectations models. At the same time, we document that firms update beliefs rationally but under incomplete information, with geographic location playing a dominant role in shaping expectations. Firms extrapolate from regional and national inflation to form euro area inflation expectations. A basic “Lucas island” model calibrated to euro area data replicates key empirical moments and highlights the structural “pass-through” from national to aggregate expectations. Our findings underscore challenges in anchoring inflation expectations in a heterogeneous monetary union.
https://doi.org/10.24148/wp2025-29
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Bibliographic Information
Provider: Federal Reserve Bank of San Francisco
Part of Series: Working Paper Series
Publication Date: 2025-12-15
Number: 2025-29
Note: A previous version of this paper was titled “SAFE to Update Inflation Expectations? New Survey Evidence on Euro Area Firms”.