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

This study analyzes how firms form their inflation expectations after 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. Our results suggest that managers' experiences keep firms attentive to inflation long after price stability is achieved. (JEL D22, D84, E31, E43, E52)