DP16689 Uncertainty and Change: Survey Evidence of Firms' Subjective Beliefs

Author(s): Rüdiger Bachmann, Kai Carstensen, Stefan Lautenbacher, Martin Schneider
Publication Date: November 2021
Keyword(s): Expectation Formation, firms, Measurement, subjective uncertainty, survey data
JEL(s): C83, D22, E20, E23
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16689

This paper studies how managers plan under uncertainty. In a new survey panel on German manufacturing firms, we show that uncertainty reflects change: Planning incorporates higher subjective uncertainty about future sales growth when the firm has just experienced unusual growth, and more so if the experience was negative. At the quarterly frequency, subjective uncertainty closely tracks conditional volatility of shocks: Both exhibit an asymmetric V-shaped relationship with past growth. In the cross section of firms, however, subjective uncertainty differs from conditional volatility: planning in successful firms-either large or fast-growing-reflects lower subjective uncertainty than in unsuccessful firms even when the size of the shocks is the same.