Learning to Forecast the Hard Way—Evidence from German Reunification

Do firms learn to forecast future business conditions after structural changes to the economy? How long does it take? We exploit German Reunification as a natural experiment, where Eastern are treated with ignorance about the distribution of market states, to test Bayesian learning. As predicted, Eastern firms initially forecast future business conditions worse than Western ones, but this gap gradually closes over a decade following Reunification. The slow convergence stems from differences in forward expectations rather than realized market conditions. These results warn of costly and drawn out adjustments to regime changes, as the trade wars, COVID19 and Brexit.