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Monetary Policy Issues in Israel

Monetary Policy Issues in Israel. Stanley Fischer Bank of Israel Prepared for Presentation at the Research Conference of the Central Bank of Chile, November 15-16 2007. Economic Performance. Growth Rate of GDP 2000-2007. %. BI- Forecast. Budget Deficit * (percentage of GDP, 2000-2007).

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Monetary Policy Issues in Israel

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  1. Monetary Policy IssuesinIsrael Stanley Fischer Bank of Israel Prepared for Presentation at the Research Conference of the Central Bank of Chile, November 15-16 2007

  2. Economic Performance

  3. Growth Rate of GDP2000-2007 % BI- Forecast

  4. Budget Deficit*(percentage of GDP, 2000-2007) % Under the assumption that the budget is fully performed *Percent of GDP; excluding credit extended. Until 1996, domestic deficit; from 1997, total deficit. *The data from 2000 refer to the deficit excluding the Bank of Israel’s profits.

  5. Public Sector Debt,Percentage of GDP, 2000-2007 (year-end) %

  6. Rate of Inflation in Last 12 Months and Inflation Targets, 1992-2007 %

  7. Bank of Israel Interest Rate, Inflation Expectations*, and the Fed’s interest Rate, 2004-2007 % *For 12 months, as derived from the capital market.

  8. The Nominal and the Real Exchange Rate2007 -1997 NIS Shekel / Dollar Exchange Rate The Real Exchange Rate by Trading Partners (100=01/1997, 01/1997-11/2007) 127.6 • A rise in the index indicates depreciation. • The figure for November 2007 is calculated from spot exchange rates known for the half-month, our forecast CPI from the monthly model, and an extrapolation of inflation in the countries whose currencies are in the currency basket. • SOURCE: IFS data. For April to November 2007, Bank of Israel calculations. *The Nis/$ chart is on a daily basis, while the real exchange rate chart is on a monthly basis.

  9. Openness of the Israeli Economy(percentage of GDP, 1995-2007*) % *First half of 2007. *Goods and Services. Source: National accounts, CBS.

  10. Current Account of Balance of Paymentsas Percentage of GDP, 1995-2007* (Annual) * First half of 2007. * Foreign Currency Department forecast • SOURCE: Balance of Payments, Central Bureau of Statistics.

  11. Non-Monetary Policy Issues

  12. Non Monetary Policy Issues: • Bank supervision • Labor dispute • Reorganization • New law • Economic advisor to the government

  13. Monetary Policy Issues

  14. Volatility of Inflation and the Exchange Rate,1997.1-2007.7 a SD of 12 months inflation. b SD of monthly depreciation against the US$. C US$ against synthetic €.

  15. Responses to FX and to Monetary Shocks

  16. Impulse Response to an FX Shock Quarterly model of BoI Monetary Department * Shock of 1 percentage point. * Immediate pass-through to inflation is about one third (FX-level, Inflation-annualized!). * Complete (though gradual) pass-through. SOURCE: Bank of Israel – Monetary department.

  17. Impulse Response to an Interest Rate Shock Quarterly model of BoI Monetary Department * Shock of 1 percentage point. SOURCE: Bank of Israel – Monetary department.

  18. Impulse Response to an FX Shock VAR(2) SOURCE: Bank of Israel – Monetary and Research departments.

  19. Impulse Response to an Interest Rate Shock (VAR(2)) SOURCE: Bank of Israel – Monetary and Research departments.

  20. Dealing with Inflation Volatility: • Core inflation or local price inflation • Remove only housing from headline Inflation • Change the law • Let nature and good performance do their work

  21. The Exchange Rate: • Frequent pressures for intervention • Stronger shekel or weaker dollar – setting out the facts • Fiscal policy • Does the interest rate react to the exchange rate?

  22. Asset Prices: • Not our issue so far • Responsibility for financial stability • What to do in the case of irrational exuberance?

  23. Interest Rate Smoothing: • Why? Publishing: • Inflation forecasts • Interest Rate forecasts • Biases, hints about future decisions

  24. Interest Rate Policy: The Taylor Rule

  25. The Estimated Equation Variables: Operators: Expectations. CPI Inflation. BoI interest rate. Difference. Inflation target (Average of next 12 months). Output gap. Nominal FX w.r.t. the US$.

  26. Estimated Policy Rule of BoI 1999.01-2007.09 ; monthly frequency * Estimation accounts for AR(1) process of the residuals.

  27. The Estimated Equation Ilek Alex (2006) Variables: Operators: Expectations. CPI Inflation. BoI interest rate. Difference. “Natural” real rate of interest. Output gap. Inflation target (Average of next 12 months). Nominal FX w.r.t. the US$.

  28. Estimated Policy Rule of BoI 1997.10-2006.04 ; monthly frequency ; Ilek (2006)

  29. Thank you

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