Business Investment Plans and Inflation Expectations

Abstract:
In this paper we empirically investigate the relationship between firms’ inflation expectations and their willingness to invest. Using survey data on Italian firms we find that a 100 basis points increase in expected inflation raises, all else equal, by nearly 2.5 percentage points the probability that a firm reports higher expected investment expenditure. While we document a minor role of the firm-level nominal borrowing cost, other determinants of investment expectations are significant, such as the credit markets’ access conditions and the expected liquidity position of firms. Our results bear important implications for policymakers whereby measures aimed at engineering higher inflation expectations may be successful at stimulating the economy.