Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/271836 
Year of Publication: 
2022
Series/Report no.: 
CESifo Working Paper No. 10192
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
In this study, we investigate how firm expectations about their own developments respond to different types of news. We classify news as either micro or macro, with micro news being information about firm-specific developments and macro news being information about the aggregate economy. Our analysis of firm surveys from Germany and Italy shows that both types of news consistently predict forecast errors, contradicting the idea of full-information rational expectations. Yet while firm expectations overreact to micro news, they underreact to macro news. We propose a model in which firms suffer from "island illusion" to explain these patterns in the data.
Subjects: 
firm expectations
survey
overreaction
underreaction
micro news
macro news
island illusion
business cycle
JEL: 
D84
C53
E71
Document Type: 
Working Paper
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