Overview
This series examines how price-setting firms interpret shocks, choose how far ahead to plan, and decide what costs to pass through. A calibrated Federal Reserve model shows that large or persistent disturbances can make another planning period worth its incremental cognitive cost; a longer horizon raises model-implied inflation sensitivity and uncertainty. Survey evidence from Italian firms with at least 50 employees, 2017Q3–2024Q4, shows incomplete, asymmetric, and heterogeneous pass-through from input-price surprises to prices and near-term expectations. The chapters connect these mechanisms while keeping them distinct: planning horizons are modeled, whereas pass-through is observed. Together they offer a conditional account, not a universal forecast; the model explains only part of measured uncertainty volatility, and the survey’s identification and population limit generalization.
Learning outcomes
- Large or persistent shocks can make extra planning worthwhile because future consequences matter more to today’s price.
- In the model, longer horizons raise inflation’s sensitivity to shocks and can create endogenous uncertainty, but explain only part of observed volatility.
- Italian firms pass input-cost surprises through incompletely and asymmetrically, with increases affecting prices and near-term expectations more than decreases.
- The model and Italian survey are complementary, not interchangeable, and neither provides a universal forecast or complete theory of inflation.
Keywords
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PlansFAQ
Why do firms’ planning horizons matter for inflation?
They matter because a longer horizon changes how strongly a firm’s price responds to current and persistent shocks. In the model, large or persistent disturbances can induce longer planning, making inflation sensitivity state dependent.
Do firms pass every input-cost increase into prices?
No. In the Italian survey, firms pass input-cost surprises through incompletely, with realized own-price responses smaller than expected responses and stronger for increases than decreases.
What makes firms respond differently to the same cost shock?
Responses differ with inflation regime, supply-chain position, uncertainty, price-adjustment behavior, margins, market power, liquidity, and information. The survey identifies heterogeneous outcomes, not one decisive cause for every subgroup.
Can firms’ planning explain inflation uncertainty?
Firms’ planning can explain part of inflation uncertainty, not all of it. The calibrated model matches a 0.44 correlation against 0.43 in the data, but its uncertainty volatility is only about 14% of the empirical measure.