An Exploration of Heterogeneity in the Macroeconomic Expectations of Firms

Abstract

Firms’ expectations on macroeconomic uncertainty are heterogeneous. However, we find that regardless, an exogenous macroeconomic news shock has a strong effect on adjusting all firms’ beliefs towards professional forecasts. This research aimed to understand how firm characteristics are associated with macroeconomic uncertainty. Initially, we find that firms in the transportation or construction industries or those who have less competitors, are less efficient, have a higher profit margin or who have less frequent discussion with their customers are associated with higher levels of macroeconomic uncertainty. These findings add to the existing literature on how expectations of firms are formed. Following this, we extend our analysis by using a RCT and examining how firms respond to an exogenous macroeconomic shock. We find that firms respond strongly to macroeconomic news, and there is limited heterogeneity in their reaction. The key exception to this is by industry groups. When interacting firm characteristics with industry groups, we find much larger degrees of heterogeneity. Our results support the Lucas Island Model hypothesis (1975), that agents form their aggregate beliefs based on environment specific information. Overall, these findings imply that central banks should consider how firm characteristics impact macroeconomic uncertainty, but nonetheless, uncertainty can be reduced universally through effective communication.