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A peek into the Governor's chamber: the Israeli case

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  • Rafi Melnick

    (Bank of Israel.)

Abstract

The paper analyzes the rules used by the Bank of Israel (BOI) to set the interest rate from mid-1993 till the end of 2001, after relative price stability had been achieved. Our approach follows the analytical framework developed since the influential contribution of Taylor (1993). We compare three policy type rules: the classic Taylor type, the interest rate parity type and the domestic real interest rate type. We give a positive answer to the question; can the path of the interest rate in Israel be explained by a well-defined policy rule? And conclude that the BoI followed a strict, forward-looking rule with smoothing based on interest rate parity considerations, including strong reaction to exchange-rate shocks. The success of reducing inflation by applying extremely tight monetary policy is exemplified in the Israeli case although our analysis shows that the disinflation process was not fully completed in the sample period, in the sense that the rate of interest did not return to a steady state level consistent with low inflation and low real rates of interest.

Suggested Citation

  • Rafi Melnick, 2005. "A peek into the Governor's chamber: the Israeli case," Israel Economic Review, Bank of Israel, vol. 3(1), pages 1-21.
    • Handle: RePEc:boi:isrerv:v:3:y:2005:i:1:p:1-21
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    File URL: https://boiwebrepec.azurefd.net/RePEc/boi/isrerv/IsER_3_2005_1_001-021.pdf
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    References listed on IDEAS

    as
    1. Leonardo Leiderman & Hadas Bar-Or, 2002. "Monetary Policy Rules and Transmission Mechanisms under Inflation Targeting in Israel," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.),Monetary Policy: Rules and Transmission Mechanisms, edition 1, volume 4, chapter 14, pages 393-426, Central Bank of Chile.
    2. Laurence M. Ball, 1999. "Policy Rules for Open Economies," NBER Chapters, in: Monetary Policy Rules, pages 127-156, National Bureau of Economic Research, Inc.
    3. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(1), pages 147-180.
    4. Bruno, Michael, 1993. "Crisis, Stabilization, and Economic Reform: Therapy by Consensus," OUP Catalogue, Oxford University Press, number 9780198286639.
    5. Michael Woodford, 1999. "Optimal Monetary Policy Inertia," Manchester School, University of Manchester, vol. 67(s1), pages 1-35.
    6. Glenn D. Rudebusch, 2001. "Is The Fed Too Timid? Monetary Policy In An Uncertain World," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 203-217, May.
    7. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, May.
    8. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
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    Cited by:

    1. Eyal Argov & Emanuel Barnea & Alon Binyamini & Eliezer Borenstein & David Elkayam & Irit Rozenshtrom, 2012. "MOISE: A DSGE Model for the Israeli Economy," Bank of Israel Working Papers 2012.06, Bank of Israel.

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