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Monetary Policy, the Output Gap and Inflation: A Closer Look at the Monetary Policy Transmission Mechanism in Israel 1989-1999

Author

Listed:
  • Joseph Djivre

    (Bank of Israel)

  • Sigal Ribon

    (Bank of Israel)

Abstract

This paper presents a quarterly structural model of the Israeli economy which delineates the transmission mechanism of the monetary policy during the years 1989-1999 and allows to evaluate the short run consequences of various exogenous shocks on both the nominal and the real sectors of the economy. The main endogenous variables of the model are the business sector output gap, the real exchange rate, the inflation rate, the Bank of Israel (BoI) short-term nominal interest rate and the rate of change of the business sector nominal wages. The estimated model is stable and exhibits to a large extent the expected properties in response to supply and demand shocks. The model specification and the estimation results give rise to a nominal transmission channel and a real activity transmission channel of the monetary policy to prices. Unlike large and relatively closed economies in which monetary policy affects prices through its effect on economic activity, in the case of Israel, the evolution of prices is affected first, through the nominal exchange rate channel, and only at a later stage is their effect felt on economic activity. The estimation results of the BoI nominal interest rate equation suggest a decreasing weight of short run economic activity in the interest rate evolution and a rising output and inflation volatility over time following supply side shocks.

Suggested Citation

  • Joseph Djivre & Sigal Ribon, 2000. "Monetary Policy, the Output Gap and Inflation: A Closer Look at the Monetary Policy Transmission Mechanism in Israel 1989-1999," Bank of Israel Working Papers 2000.09, Bank of Israel.
    • Handle: RePEc:boi:wpaper:2000.09
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    References listed on IDEAS

    as
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    Cited by:

    1. Tanya Suhoy & Yotam Sofer, 2019. "Getting to Work in Israel: Locality and Individual Effects," Bank of Israel Working Papers 2019.02, Bank of Israel.
    2. Yigal Menashe & Yossi Yakhin, 2004. "Mind the Gap: Structural and Nonstructural Approaches to Estimating Israel's Output Gap," Israel Economic Review, Bank of Israel, vol. 2(2), pages 79-106.
    3. Hedva Ber & Asher Blass & Oved Yosha, 2001. "Monetary Transmission in an Open Economy: The Differential Impact on Exporting and Non-Exporting Firms," Bank of Israel Working Papers 2001.01, Bank of Israel.
    4. Sigal Ribon, 2004. "A New Phillips Curve for Israel," Bank of Israel Working Papers 2004.11, Bank of Israel.
    5. Yosha, Oved & Ber, Hedva & Blass, Asher, 2002. "Monetary Policy in an Open Economy: The Differential Impact on Exporting and Non-Exporting Firms," CEPR Discussion Papers 3191, C.E.P.R. Discussion Papers.
    6. Ami Barnea & Joseph Djivre, 2004. "Changes in Monetary and Exchange Rate Policies and the Transmission Mechanism in Israel, 1989.IV – 2002.I," Bank of Israel Working Papers 2004.13, Bank of Israel.
    7. Vratislav Izak, 2001. "External Factors in Czech Disinflation (Dynamic Analysis)," Archive of Monetary Policy Division Working Papers 2001/35, Czech National Bank.

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