Producers’ Expectation Shocks and Business Cycles

This paper assesses producer-expectation-driven business cycle fluctuations. Based on theoretical predictions of a multi-sector model with market frictions and adjustment cost, and using a unique panel of producer-level data, it seeks to unravel the patterns of dynamic responses to producers’ expectation shocks. Overall, there is microevidence of co-movements among firm’s production, employment, investment intention and capacity utilization due to positive expectation shocks. Moreover, the effect seems permanent on firm’s outcomes and highly persistent on investment intentions fluctuations. Findings suggest that producers’ expectation shocks explain between 6 and 10% of output fluctuations in the short-run, which is a non-negligible explanation power and may offer support to the news-driven business cycle literature. Still, the theoretical model developed illustrates how adjustment costs and labor market frictions could be dragging down the measured impact.