Who’s paying attention? How firms form policy rate expectations

Lea Havemeister, Nicholas Bloom, Philip Bunn, Paul Mizen, Gregory Thwaites and Ivan Yotzov

Monetary policymakers carefully craft their policy decisions and communication, and financial markets respond quickly. Yet the effect of policy on the economy ultimately depends on how firms perceive and anticipate monetary policy. We present new data from an economy-wide UK business survey on Bank Rate perceptions and expectations. The data provide direct evidence on monetary policy transmission, specifically on how firms form and update policy rate expectations. Firms’ perceptions of current policy rates are precise, and expectations adjust rapidly to policy decisions within days. Moreover, more productive firms and those with higher levels of borrowing forecast policy rates more accurately. CEOs and CFOs also link policy rate expectations to inflation expectations in ways consistent with standard macroeconomic models.

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Markup matters: monetary policy works through aspirations

Tim Willems and Rick van der Ploeg

Since the post-Covid rise in inflation has been accompanied by strong wage growth, interactions between wage and price-setters, each wishing to attain a certain markup, have regained prominence. In our recently published Staff Working Paper, we ask how monetary policy should be conducted amid, what has been referred to as, a ‘battle of the markups’. We find that countercyclicality in aspired price markups (‘sellers’ inflation’) calls for more dovish monetary policy. Empirically, we however find markups to be procyclical for most countries, in which case tighter monetary policy is the appropriate response to above-target inflation.

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What can we learn about monetary policy transmission using international industry-panel data?

Sangyup Choi, Tim Willems and Seung Yong Yoo

How does monetary policy really affect the real economy? What kinds of firms or industries are more sensitive to changes in the stance of monetary policy, and through which exact channels? Despite advances in our understanding of the monetary transmission mechanism, existing studies have not reached a consensus regarding the exact mechanics of transmission. In a recently published Staff Working Paper, we aim to contribute to this understanding by analysing the impact of monetary policy on industry-level outcomes across a broad international industry-panel data set, exploiting the notion that different transmission channels are of varying degrees of importance to different industries.

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