Working Paper: NBER ID: w31507
Authors: Yuriy Gorodnichenko; Rafi Melnick; Ari Kutai
Abstract: This study analyzes how firms form their inflation expectations during a regime change in monetary policy and a transition to a low-inflation environment. Using the Bank of Israel survey of firms, we document the basic properties of firms’ inflation expectations and examine 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 for the next year and quarter. A surprise hike in the monetary interest rate leads to a downward adjustment in inflation expectations.
Keywords: Inflation expectations; Monetary policy; Israeli firms survey
JEL Codes: D22; E31; E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Positive inflation surprise (E31) | Upward adjustment in inflation expectations (E31) |
| Surprise hike in monetary policy interest rate (E43) | Downward adjustment in inflation expectations (E31) |