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Endogenous Monetary Policy Credibility in a Small Macro Model of Israel

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Author Info

  • Eyal Argov
  • David Rose
  • Philippe D Karam
  • Natan P. Epstein
  • Douglas Laxton

Abstract

This paper extends a small linear model of the Israeli economy to allow for nonlinearities in the inflation-output process that arise from convexity in the Phillips curve and endogenous monetary policy credibility. We find that the dynamic responses to shocks in the extended model more closely resemble features in the data from the period 2001?03. In particular, the extended model does a much better job in accounting for the deterioration in monetary policy credibility and the output costs of regaining monetary policy credibility once it has been lost.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/207.

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Length: 33
Date of creation: 01 Aug 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/207

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Related research

Keywords: Inflation targeting; Economic models; inflation; monetary policy; central bank; inflation target; monetary fund; real interest rate; inflation rate; monetary authorities; low ? inflation; low inflation; actual inflation; high ? inflation; monetary economics; inflationary pressures; long-term interest rates; real interest rates; monetary policy reaction function; relative price; high inflation; rational expectations; inflation-targeting; inflation rising; monetary policy rules; rate of inflation; control of inflation; real exchange rates; inflation equation; expansionary monetary policy; nominal interest rates; increase in interest rates; nominal interest rate; inflation process; inflation rates; inflation dynamics;

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References

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  1. Isard, Peter & Laxton, Douglas & Eliasson, Ann-Charlotte, 2001. "Inflation targeting with NAIRU uncertainty and endogenous policy credibility," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 25(1-2), pages 115-148, January.
  2. Papa M'B. P. N'Diaye & Douglas Laxton, 2002. "Monetary Policy Credibility and the Unemployment-Inflation Tradeoff," IMF Working Papers 02/220, International Monetary Fund.
  3. Guy Debelle & Douglas Laxton, 1997. "Is the Phillips Curve Really a Curve? Some Evidence for Canada, the United Kingdom, and the United States," IMF Staff Papers, Palgrave Macmillan, vol. 44(2), pages 249-282, June.
  4. Douglas Laxton & Andrew Berg & Philippe D Karam, 2006. "A Practical Model-Based Approach to Monetary Policy Analysis: Overview," IMF Working Papers 06/80, International Monetary Fund.
  5. Faust, Jon & Svensson, Lars E O, 1998. "Transparency and Credibility: Monetary Policy with Unobservable Goals," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1852, C.E.P.R. Discussion Papers.
  6. Svensson, Lars E O, 1998. "Open-Economy Inflation Targeting," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1989, C.E.P.R. Discussion Papers.
  7. Douglas Laxton & Guy Meredith & David Rose, 1994. "Asymmetric Effects of Economic Activityon Inflation," IMF Working Papers 94/139, International Monetary Fund.
  8. John D. Stiver, 2003. "Expectations, and Credibility in a Model of Monetary Policy," Working papers, University of Connecticut, Department of Economics 2003-34, University of Connecticut, Department of Economics.
  9. Douglas Laxton & Guy Meredith & David Rose, 1995. "Asymmetric Effects of Economic Activity on Inflation: Evidence and Policy Implications," IMF Staff Papers, Palgrave Macmillan, vol. 42(2), pages 344-374, June.
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Citations

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Cited by:
  1. Igor Ermolaev & Michel Juillard & Ioan Carabenciov & Charles Freedman & Douglas Laxton & Ondra Kamenik & Dmitry Korshunov, 2008. "A Small Quarterly Projection Model of the US Economy," IMF Working Papers 08/278, International Monetary Fund.
  2. Carlos García & Jorge Restrepo & Scott Roger, 2009. "Hybrid Inflation Targeting Regimes," Working Papers Central Bank of Chile, Central Bank of Chile 533, Central Bank of Chile.
  3. Maria Demertzis & Massimiliano Marcellino & Nicola Viegi, 2008. "A Measure for Credibility: Tracking US Monetary Developments," Economics Working Papers, European University Institute ECO2008/38, European University Institute.
  4. Maria Demertzis & Massimiliano Marcellino & Nicola Viegi, 2010. "Anchors for Inflation Expectations," Economics Working Papers, European University Institute ECO2010/10, European University Institute.
  5. Michel Juillard & Charles Freedman & Dmitry Korshunov & Douglas Laxton & Ondra Kamenik & Ioan Carabenciov & Igor Ermolaev & Jared Laxton, 2008. "A Small Quarterly Multi-Country Projection Model with Financial-Real Linkages and Oil Prices," IMF Working Papers 08/280, International Monetary Fund.
  6. Argov, Eyal, 2012. "The choice of a foreign price measure in a Bayesian estimated new-Keynesian model for Israel," Economic Modelling, Elsevier, Elsevier, vol. 29(2), pages 408-420.
  7. Inci Ötker & Charles Freedman, 2009. "Country Experiences with the Introduction and Implementation of Inflation Targeting," IMF Working Papers 09/161, International Monetary Fund.
  8. Carrasco, Bruno & Mukhopadhyay, Hiranya, 2014. "Reserve Bank of India’s Policy Dilemmas: Reconciling Policy Goals in Times of Turbulence," ADB Economics Working Paper Series 393, Asian Development Bank.
  9. Clinton, Kevin & Garcia-Saltos, Roberto & Johnson, Marianne & Kamenik, Ondrej & Laxton, Douglas, 2010. "International deflation risks under alternative macroeconomic policies," Journal of the Japanese and International Economies, Elsevier, vol. 24(2), pages 140-177, June.
  10. International Monetary Fund, 2009. "Inflation Targeting Under Imperfect Policy Credibility," IMF Working Papers 09/94, International Monetary Fund.
  11. Malikane, Christopher & Ojah, Kalu, 2014. "Fisher's Relation and the Term Structure: Implications for IS Curves," MPRA Paper 55553, University Library of Munich, Germany.
  12. Garcia, Carlos J. & Restrepo, Jorge E. & Roger, Scott, 2011. "How much should inflation targeters care about the exchange rate?," Journal of International Money and Finance, Elsevier, Elsevier, vol. 30(7), pages 1590-1617.
  13. Jared Laxton & Igor Ermolaev & Charles Freedman & Ondra Kamenik & Michel Juillard & Douglas Laxton & Ioan Carabenciov & Dmitry Korshunov, 2008. "A Small Quarterly Multi-Country Projection Model," IMF Working Papers 08/279, International Monetary Fund.

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