Uncertainty
Do firms learn to forecast the future?
In this paper as ask how do firms learn to forecast future business conditions after major structural changes to the economy? How long does it take? We exploit German Reunification as a natural experiment, where firms in the East are treated with ignorance about the distribution of market states, to test a Bayesian learning framework. As predicted, we find that Eastern firms initially forecast future business conditions worse than Western ones, but this gap gradually closes over most of a decade following Reunification. The slow convergence stems from differences in forward expectations rather than realized market conditions. These results warn of costly and drawn out firm-level adjustments to contemporary regime changes, such as the US-China Trade War, COVID19 and Brexit.
The Brexit Effect on German Firms
Brexit probably reduced UK firm performance. But how did Brexit effect firms in trading partner countries? This paper uses unique ifo surveys on German manufacturing firm's Brexit expectations, uncertainty, and performance, which allow a difference-in-differences identification of the Brexit effects on firm uncertainty and qualitative performance measures like perceived inventory adequacy and lack of orders and materials. I find little evidence for a negative impact of Brexit on German manufacturing firms. The withdrawal of individual countries from international trade and supply chains does not have to have adverse effects on trading partners.