Using data from the euro area SAFE, a novel survey of firms’ inflation expectations including a randomized controlled trial (RCT), we show that firms’ inflation expectations exhibit significant heterogeneity, challenging the predictions of full-information rational expectations models. At the same time, we document that firms form beliefs consistent with rational Bayesian updating under incomplete information, with geographic location playing a dominant role in shaping expectations. Firms extrapolate from regional and national inflation to form euro area inflation expectations. A basic “Lucas island” model calibrated to euro area data replicates key empirical moments and highlights the structural “pass through” from national to aggregate expectations. Our findings underscore challenges in anchoring inflation expectations in a heterogeneous monetary union.
Suggested citation:
Baumann, Ursel, Annalisa Ferrando, Dimitris Georgarakos, Yuriy Gorodnichenko, and Timo Reinelt. 2026. “Firms’ Inflation Expectations in a Monetary Union.” Federal Reserve Bank of San Francisco Working Paper 2025-29. https://doi.org/10.24148/wp2025-29