Inflation Expectations in a Highly Volatile Environment: Evidence from a Firms' Survey

Abstract

This study provides new evidence about inflation expectations formation in a highly volatile environment, in which inflation dropped dramatically from three-digits annual rate to less than 3%. Our findings, based on an Israeli survey of firms' expectations, support information rigidity theories, and at the same time point to the presence of asymmetric preference towards forecast errors. Most importantly, both inattentiveness and asymmetry depend on inflation, being more pronounced when inflation is sufficiently decreasing. This pattern applies both for high and low inflation regimes. Our evidence demonstrates the complexity of inflation expectations, having important implications for macroeconomic dynamics and policy issues.

Keywords: Inflation, Expectations, Information Rigidity, Rational Inattention

JEL Classification: D84, E31, E37