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Measuring the Effect of Forward Guidance in Small Open Economies: The Case of Israel

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  • Ari Kutai

    (Bank of Israel)

Abstract

In this paper, I measure the effect of forward guidance in a small and open economy using Israel as a case study. I suggest an alternative approach to the standard method of Gürkaynak et al. (2005) that relaxes the assumption of constant structure and estimates the effect of forward guidance (FG) separately for each shock and term to maturity. Namely, I relax the assumption that the relative effect is fixed across maturities for every FG shock, regardless of the information contained in each FG statement. This approach also controls for global shocks under the assessment that their impact may not be negligible in a small open economy. I find that while the estimates of the shocks from both methods are highly correlated, in cases where the FG shocks mainly affect specific terms to maturity the standard method leads to imprecise identifications. The results suggest that policymakers should take into consideration which term to maturity each FG statement impacts. In addition, I show that some of the main FG statements made by the Bank of Israel had a significant effect on yields.

Suggested Citation

  • Ari Kutai, 2020. "Measuring the Effect of Forward Guidance in Small Open Economies: The Case of Israel," Bank of Israel Working Papers 2020.03, Bank of Israel.
    • Handle: RePEc:boi:wpaper:2020.03
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    Cited by:

    1. Benchimol, Jonathan & Saadon, Yossi & Segev, Nimrod, 2023. "Stock market reactions to monetary policy surprises under uncertainty," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 89, pages 1-12.
    2. Nimrod Cohen, 2022. "Analysis of the Amplification Mechanisms in the Process of Debt Deleveraging," Bank of Israel Working Papers 2022.16, Bank of Israel.
    3. Itamar Caspi & Amit Friedman & Sigal Ribon, 2024. "Shocks and Currents: Monetary Policy and Israel’s Foreign Exchange Market," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 66(3), pages 454-481, September.
    4. Benchimol, Jonathan & Gamrasni, Inon & Kahn, Michael & Ribon, Sigal & Saadon, Yossi & Ben-Ze’ev, Noam & Segal, Asaf & Shizgal, Yitzchak, 2022. "The interaction between domestic monetary policy and macroprudential policy in Israel," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 112, pages 1-19.

    More about this item

    Keywords

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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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