This dissertation investigates the macroeconomic implications of bounded rationality, firm dynamics, and the effects of monetary policies. Chapter 1 examines how firms’ financing structures influence their inflation expectations and inattention using merged Italian firm-level administrative and survey data. I provide causal evidence that firms heavily reliant on bank loans are better informed about inflation and make smaller forecast errors. I also show that financing composition affects firms’ learning from new information with randomized control trials. A partial equilibrium model featuring rational inattention shows that firms become more attentive when their financing costs are sensitive to inflation. Inflation impacts the relative cost of external versus internal funding, leading f...[ Read more ]

This dissertation investigates the macroeconomic implications of bounded rationality, firm dynamics, and the effects of monetary policies. Chapter 1 examines how firms’ financing structures influence their inflation expectations and inattention using merged Italian firm-level administrative and survey data. I provide causal evidence that firms heavily reliant on bank loans are better informed about inflation and make smaller forecast errors. I also show that financing composition affects firms’ learning from new information with randomized control trials. A partial equilibrium model featuring rational inattention shows that firms become more attentive when their financing costs are sensitive to inflation. Inflation impacts the relative cost of external versus internal funding, leading firms to adjust their investment, capital structure, and attention allocation. This mechanism with the heterogeneous financing structure across firms generates dispersion in inflation expectations, replicating the empirical evidence and generating implications on the effectiveness of monetary policy.

Chapter 2 presents a business cycle model with endogenous firm entry. Rising aggregate demand spurs entry, expanding supply, and reinforcing demand through entrants’ investment expenditures. Monetary policy influences both aggregate demand and the entry decisions of financially constrained firms, shaping cycle dynamics in economies with high entry potential. Equilibrium firm entry is characterized by the “policy room”, a sufficient statistic for monetary policy effectiveness in both the model and empirical data.

Chapter 3 documents the predictability of forecast errors on forecasts in housing price growth rate using the Survey of Consumer Expectations. It introduces diagnostic expectations into a two-agent New Keynesian model to explain over-optimism in housing markets. This approach outperforms rational expectations in capturing macroeconomic responses to shocks and highlights the role of monetary policy in shaping these dynamics.