Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/171348 
Year of Publication: 
2017
Series/Report no.: 
SAFE Working Paper No. 187
Publisher: 
Goethe University Frankfurt, SAFE - Sustainable Architecture for Finance in Europe, Frankfurt a. M.
Abstract: 
This paper presents new evidence on the expectation formation process of firms from a survey of the German manufacturing sector. It focuses on the expectation about their future business conditions, which enters the widely followed economic sentiment index and which is an important determinant of their employment and investment decisions. We find that firms extrapolate their experience too much and make predictable forecasting errors. Moreover, firms do not seem to anticipate the upcoming reversals of business cycle peaks and troughs which causes suboptimal adjustment of investment and employment and affects their inventories and profits. However, the impact on expectation errors decreases with the size and the age of the firm as firms learn to reduce their extrapolation bias over time.
Subjects: 
Expectation Formation
Expectation Error
Learning
Extrapolation
Experience
JEL: 
D90
E70
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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