Central Bank Study Maps the Psychology of Firms Under High Inflation

A newly published working paper by the Central Bank of the Republic of Turkey (CBRT) sheds light on the psychological pressures shaping firm behavior in an environment of high inflation and tight monetary policy. Titled “Behavioral Psychology of Firms: From Perceptions to Actions,” the study provides a data-driven analysis of how distorted perceptions, fear, and managerial expectations influence pricing, production, and employment decisions in the real sector.

Rather than focusing solely on macroeconomic indicators, the CBRT economists examine the behavioral mechanisms through which inflation affects corporate decision-making. The findings suggest that inflation not only disrupts cost structures and demand conditions but also fundamentally alters how firms interpret economic reality.

Inflation and the Rise of the “Survival Mindset”

According to coverage by Ekonomim, one of the most striking conclusions of the study is the psychological strain imposed by prolonged high inflation. As price instability persists, firm managers increasingly fear the erosion of profit margins, triggering defensive behavior across sectors.

The analysis shows that during high-inflation periods, the risk of losing profitability becomes a dominant concern. This fear transforms corporate behavior from growth-oriented planning to short-term survival strategies. As a result, firms may abandon rational pricing frameworks and instead adopt precautionary price hikes to protect perceived margins.

The report identifies this phenomenon as a key channel through which inflation feeds back into itself, amplifying price instability even when cost pressures are not immediately present.

Pricing Behavior Becomes Detached From Fundamentals

One of the central arguments of the working paper is that pricing decisions in inflationary environments are no longer driven purely by costs, demand, or productivity. Instead, they become increasingly shaped by expectations of future losses.

When managers believe profitability is under threat, they are more likely to raise prices preemptively, hedge against uncertainty, and prioritize margin preservation over competitiveness. This behavior distorts market signals and weakens the effectiveness of monetary policy.

The study emphasizes that inflation erodes not only purchasing power but also decision-making clarity, making it harder for firms to accurately assess real financial conditions.

How Perceived Profitability Drives Corporate Action

At the core of the CBRT’s analysis is the concept of perceived profitability and its transformation into real economic actions. In the summary section of the study, the authors explain their framework as follows:

“A change in firm managers’ perception of profitability can translate into actions toward either expansion or contraction. This study focuses on the causes and consequences of changes in perceived profitability. First, conceptual constructs related to how firm managers perceive and interpret economic activity are established. Then, the relationships between these constructs are modeled using the Structural Equation Modeling method.”

This approach allows researchers to quantify how subjective perceptions—rather than objective indicators alone—drive decisions related to pricing, output, investment, and employment.

Evidence From Real Sector Interviews

The empirical foundation of the study is built on data collected through the Real Sector Economic Lens (RESİM) program, which the CBRT conducts to conduct structured interviews with firms across Turkey. These interviews capture managerial sentiment, expectations, and behavioral responses under different monetary conditions.

Using Structural Equation Modeling, the researchers derived several key findings that highlight the interaction between psychology and policy.

The first finding directly links inflation to pricing distortions:

“During periods of high inflation, the fear of losing profitability becomes a dominant emotion among firms and can disrupt pricing behavior.”

This confirms that fear acts as a behavioral transmission channel, weakening pricing discipline.

The second finding focuses on production incentives under tight monetary policy:

“During periods of tight monetary policy, optimism about external demand more strongly motivates firms’ production activities.”

This suggests that when domestic financial conditions are restrictive, expectations about foreign demand become a critical driver of output decisions.

The third finding relates to employment behavior:

“When monetary policy is tight, employment intentions are primarily observed among firms that also have investment intentions.”

In other words, hiring plans tend to persist only among firms willing and able to invest, while others adopt a more cautious stance.

Finally, the study highlights the persistence of pessimistic perceptions even after policy shifts:

“Even when monetary policy becomes supportive, firms may continue to perceive financial conditions as tight during certain periods.”

This lag in perception implies that policy easing does not immediately translate into improved business confidence.

Implications for Monetary Policy Effectiveness

The CBRT’s findings suggest that monetary transmission is not purely mechanical. Interest rate changes and liquidity adjustments can be delayed or weakened if firms remain psychologically anchored to a high-risk environment.

If managers continue to perceive financial conditions as restrictive, they may postpone investment, avoid hiring, and maintain aggressive pricing strategies—even when objective indicators improve.

The study underscores the importance of credibility, communication, and expectation management in restoring normal pricing behavior and rebuilding confidence in the real sector.

Restoring Stability Requires More Than Rate Decisions

Ultimately, the working paper argues that fighting inflation requires more than numerical tightening or easing. It also requires correcting distorted perceptions, reducing fear-driven behavior, and restoring firms’ ability to make decisions based on fundamentals rather than anxiety.

By mapping the psychological landscape of firms under inflationary stress, the CBRT provides policymakers with a deeper understanding of why economic normalization can take longer than expected—and why confidence is as critical as capital in stabilizing markets.