Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/273488 
Year of Publication: 
2023
Series/Report no.: 
Working Papers of the Priority Programme 1859 "Experience and Expectation. Historical Foundations of Economic Behaviour" No. 43
Publisher: 
Humboldt University Berlin, Berlin
Abstract: 
Using firm-level data, we study how firm expectations adjust to news while accounting for a) the heterogeneity of news and b) the heterogeneity of firms. We classify news as either micro or macro, that is, information about firm-specific developments or information about the aggregate economy. Survey data for German and Italian firms allows us to reject rational expectations: Both types of news predict forecast errors at the firm level. Yet while firm expectations overreact to micro news, they underreact to macro news. We propose a general-equilibrium model where firms suffer from 'island illusion' to explain these patterns in the data.
Subjects: 
Survey data
salience
overreaction
underreaction
micro news
macro news
island illusion
business cycle
JEL: 
D84
C53
E71
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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