The reaction of firms' expectations to monetary policy: evidence from Norwegian firms

An important transmission channel of monetary policy is the expectations channel. However, although this channel is important in theory, it has received limited attention in the empirical literature. One reason for this lack of focus is the scarcity of data on firms' expectations. This paper uses a novel data set on firms' expectations and estimates how they respond to monetary policy announcements. I find that firms respond to unexpected changes in the current policy rate by revising downward expectations about price pressure, output and employment growth, and labor market tightness. However, following an unexpected tightening in the future path of monetary policy, firms revise upward expectations about output growth. While the first result is in line with the predictions of the New Keynesian model, the second provides support for the information effect of monetary policy.