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Estimating the NAIRU for Israel, 1992–2011

Author

Listed:
  • David Elkayam

    (Bank of Israel)

  • Alex Ilek

    (Bank of Israel)

Abstract

We use a state space model to estimate the time-varying NAIRU for Israel for the period 1992–2011. We specify a forward looking Phillips curve, and use data on inflation expectations derived from the bond market in Israel ("breakeven inflation") as a proxy for inflation expectations. This enables us to avoid making an assumption regarding the formation of expectations, especially avoiding the usual practice of assuming adaptive expectations and using lags of inflation as proxies for inflation expectations. We find that the estimated NAIRU is fairly variable and explains a great deal of the low frequency dynamics of the actual unemployment rate. For example, from 2004 to 2011, actual unemployment declined by 6.5 percentage points. Our estimates suggest that 5.5 percentage points (most of the reduction) were due to a decline in the NAIRU. We also found that the estimated NAIRU fits very well in a Beveridge curve, and thus helps to identify the close relationship between job vacancies and unemployment.

Suggested Citation

  • David Elkayam & Alex Ilek, 2013. "Estimating the NAIRU for Israel, 1992–2011," Bank of Israel Working Papers 2013.04, Bank of Israel.
    • Handle: RePEc:boi:wpaper:2013.04
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    Cited by:

    1. David Elkayam & Guy Segal, 2018. "Estimated Natural Rate of Interest in an Open Economy: The Case of Israel," Bank of Israel Working Papers 2018.05, Bank of Israel.
    2. Tanya Suhoy & Yotam Sofer, 2019. "Getting to Work in Israel: Locality and Individual Effects," Bank of Israel Working Papers 2019.02, Bank of Israel.
    3. Cukierman, Alex & Melnick, Rafi, 2015. "The Conquest of Israeli Inflation and Current Policy Dilemmas," CEPR Discussion Papers 10955, C.E.P.R. Discussion Papers.
    4. Nitzan Tzur-Ilan, 2018. "LTV Limits and Borrower Risk," Bank of Israel Working Papers 2018.12, Bank of Israel.

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