Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/148114
Authors: 
Richards, Simon
Verstraete, Matthieu
Year of Publication: 
2016
Series/Report no.: 
Bank of Canada Staff Working Paper 2016-7
Abstract: 
Inflation expectations are a key determinant of actual and future inflation and thus matter for the conduct of monetary policy. We study how firms form their inflation expectations using quarterly firm-level data from the Bank of Canada's Business Outlook Survey, spanning the 2001 to 2015 period. The data are aggregated to construct an inflation expectations index. Results based on the index suggest that expectations are not consistent with the rationality assumption but are, still, more complex than purely adaptive expectations. Firms' own unique experiences, such as the dynamics of the prices they expect to pay (wages/inputs), significantly influence aggregate expectations. Expectations are also found to be significantly and positively correlated with movements in oil prices. Most of the preceding results hold at the firm level. The estimation of structural shift specifications suggests that inflation expectations in Canada have drifted downward since the Great Recession. However, the data do not suggest that Canadian businesses' expectations have become unanchored.
Subjects: 
Credibility
Central bank research
Econometric and statistical methods
Firm dynamics
Inflation targets
Inflation and prices
Monetary policy framework
JEL: 
C1
C2
C25
D21
D84
E31
E52
E58
Document Type: 
Working Paper

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