Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/275757 
Year of Publication: 
2023
Series/Report no.: 
ifo Working Paper No. 400
Publisher: 
ifo Institute - Leibniz Institute for Economic Research at the University of Munich, Munich
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
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.