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Monetary Policy Rules and Transmission Mechanisms Under Inflation Targeting in Israel

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  • Leonardo Leiderman
  • Hadas Bar-Or
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    Abstract

    This paper analyzes Israel's recent inflation targeting policies and their role in the disinflation process in the 1990s. Special features of Israel underlying inflation targeting are: a high-inflation history; lack of consensus about the benefits from reducing inflation and thereby lack of full credibility of monetary policy; the existence of monetary policy overburdening in its attempts to meet the inflation targets; the coexistence of an exchange rate band together with the inflation targets. A key finding of the econometric analysis is that there is a time-varying passthrough from exchange rates to prices, which depends on the state of the business cycle and the size of exchange rate fluctuations. In the present empirical specifications, monetary conditions are shown to have played a key role in accounting for the various turning points along the disinflation process. Estimates of an analogue of a 'Taylor rule' indicate that in contrast with the monetary accommodation that prevailed in the past, monetary policy in the more recent years has acted as an inflation stabilizer.

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    Bibliographic Info

    Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 71.

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    Date of creation: 2000
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    Handle: RePEc:chb:bcchwp:71

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    1. Bernanke, Ben S & Woodford, Michael, 1997. "Inflation Forecasts and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 653-84, November.
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    Cited by:
    1. Bennett T. McCallum, 2000. "The Present and Future of Monetary Policy Rules," NBER Working Papers 7916, National Bureau of Economic Research, Inc.
    2. Amato, Jeffery D. & Gerlach, Stefan, 2002. "Inflation targeting in emerging market and transition economies: Lessons after a decade," European Economic Review, Elsevier, vol. 46(4-5), pages 781-790, May.
    3. Carlos Ibarra, 2005. "The Behavior of Interest Rate Differentials Under Shifting Exchange Rate Regimes: The Experience of Chile, Colombia and Israel," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 42(125), pages 103-131.

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