Firms’ Price, Cost and Activity Expectations: Evidence from Micro Data

Abstract

Abstract Firms’ expectations play a central role in modern macroeconomic models, but little is known empirically about them. Using panel data on manufacturing firms’ expectations about prices and wage rates, new orders, employment and unit costs for the United Kingdom, we document a range of stylised facts about firms’ expectations and their determinants. There is wide dispersion of expectations across firms. Firms' expectations are influenced by both firm-specific factors and macroeconomic factors. We find a significant connection between past expected price and wage increases and their out-turns. Firms’ expectations are, however, clearly not rational.