Information and the Formation of Inflation Expectations by Firms: Evidence from a Survey of Israeli Firms

Abstract

This study analyzes how firms form their inflation expectations after a regime change in monetary policy and a transition to a low-inflation environment. Utilizing the Bank of Israel’s survey of firms, we document the basic properties of firms’ inflation expectations and investigate how Israeli firms update their inflation expectations after receiving new information about inflation or monetary policy. We find that even after successful de-dollarization and disinflation, a positive inflation surprise leads to a sizable upward adjustment in inflation expectations. A surprise hike in the monetary interest rate leads to a downward adjustment in inflation expectations. Shocks in the early 2000s are particularly important for the estimated effects. Our results suggest that, given their lifetime experiences, firms’ managers remain fairly attentive to inflation long after price stability has been achieved.

Keywords: monetary policy, surveys, firms, inflation expectations. JEL Classification Codes: D22, E31, E52, D22