Are monetary surprises effective? The view of professional forecasters in Israel

In this study we analyze the effect of the Bank of Israel (BOI) monetary surprises on inflation and the exchange rate, in the eyes of professional forecasters (PF) in Israel. We exploit a unique daily dataset in Israel containing various forecasts of the PF in sample from April 2001 to October 2016 and derive the monetary surprises of the BOI by exploiting the specific timing of expectations formation. We found that although the PF-perceived effect of monetary surprises on the exchange rate was stable over the past two decades, the pass-through from the exchange rate to inflation significantly declined after 2007, primarily due to a full dissociation of rent prices from the shekel-dollar exchange rate. We also provide indirect and partial evidence that the effect of the BOI monetary surprises on real activity did not change after 2007. That is, we didn't find evidence that the information channel introduced by Nakamura and Steinsson (2018) intensified in Israel despite a decline in natural rates worldwide and the establishment of a monetary committee at the BOI. We found, however, that after the establishment of the monetary committee there was a significant increase in interest-rate inertia. Finally, we found an asymmetric pattern of the PF's assessment of the CB interest rate after the global financial crisis. Following a positive surprise in the BOI interest rate, the PFs significantly updated upward their forecasts for the interest rate for the coming year. In contrast, when the monetary surprise was negative, the PFs barely updated downward their forecast for the interest rate.