Firms’ expectations and monetary policy shocks in the euro area
SourceJournal of International Money and Finance
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We investigate the impact of monetary policy shocks on firms’ selling price and production expectations utilizing a proxy structural vector autoregressive (SVAR) model for ten euro area economies during the period from 1999:1 to 2018:6. To identify monetary policy shocks, we utilize instruments such as a narrative measure of monetary policy. Our estimated impulse responses indicate that firms initially revise their expectations in a manner consistent with imperfect information theoretical settings, e.g., increasing their production and selling price expectations after an unanticipated interest rate hike. Interestingly, we observe an overshooting pattern consistent with firms’ learning over time. Following the initial surprise that leads firms to raise their production and selling price expectations after an unanticipated interest rate hike, firms gradually come to expect contractionary monetary policy shocks to decrease economic activity, consistent with initially imperfectly informed firms revising their expectations in accordance with a learning process about the economy.