Giuditta Perinelli

Abstract: Using security-level holdings of bond and equity fund shares, we show how different investors respond to inflation shocks, distinguishing between cost-push (‘bad”) inflation and demand-driven (good”) inflation. We compare flows across different fund shares - held by different investors - within the same fund. In the aggregate, bad inflation shocks lead to stagflation, hurting bond and equity funds’ performance and leading to outflows. By contrast, good inflation shocks raise expected inflation when economic activity is high, hurting bonds but lifting equity. We show that aggregate responses are driven primarily by the re-balancing of Investment Funds who respond quickly and strongly to shocks. Households’ response is less pronounced quantitatively but persistent. By contrast, Insurance Companies are ‘steady-hand” investors, showing an overall more muted reaction to inflation shocks.

Abstract: We provide causal evidence that firms’ investment responsiveness to inflation depends strongly on the horizon over which inflation is expected. Exploiting a randomized information treatment embedded in the Bank of Italy’s Survey of Inflation and Growth Expectations, we construct a sign-adjusted instrument for exogenous shocks to expected inflation at horizons of six months, one year, two years, and three–five years. We show that total investment is increasing in the forecast horizon, but the effect is larger for tangible than intangible investment. We interpret these findings through the lens of a classic Mundell-Tobin channel. Higher inflation expectations reduce the real cost of externally financed tangible capital and stimulates investment. Intangible investment, which is primarily internally financed, rises only through its complementarity with tangibles. Our heterogeneity analyses by expectation horizon, liquidity, and leverage help rule out alternative channels, reinforcing our interpretation.