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.
The full article in
PDF file
To the Discussion Paper Series - Research Department page
