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1 Monetary Policy Issues in Israel Stanley Fischer Bank of Israel Prepared for Presentation at the Research Conference of the Central Bank of Chile, November.

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Presentation on theme: "1 Monetary Policy Issues in Israel Stanley Fischer Bank of Israel Prepared for Presentation at the Research Conference of the Central Bank of Chile, November."— Presentation transcript:

1 1 Monetary Policy Issues in Israel Stanley Fischer Bank of Israel Prepared for Presentation at the Research Conference of the Central Bank of Chile, November

2 2 Economic Performance

3 3 Growth Rate of GDP % BI- Forecast

4 4 % * Budget Deficit* (percentage of GDP, ) *Percent of GDP; excluding credit extended. Until 1996, domestic deficit; from 1997, total deficit. *The data from 2000 refer to the deficit excluding the Bank of Israel’s profits. Under the assumption that the budget is fully performed

5 5 Public Sector Debt, Percentage of GDP, ( year-end ) %

6 6 Rate of Inflation in Last 12 Months and Inflation Targets, %

7 7 Bank of Israel Interest Rate, Inflation Expectations*, and the Fed’s interest Rate, % *For 12 months, as derived from the capital market.

8 8 The Nominal and the Real Exchange Rate Shekel / Dollar Exchange Rate The Real Exchange Rate by Trading Partners (100=01/1997, 01/ /2007) NIS *The Nis/$ chart is on a daily basis, while the real exchange rate chart is on a monthly basis. A rise in the index indicates depreciation. The figure for November 2007 is calculated from spot exchange rates known for the half-month, our forecast CPI from the monthly model, and an extrapolation of inflation in the countries whose currencies are in the currency basket. SOURCE: IFS data. For April to November 2007, Bank of Israel calculations.

9 9 Openness of the Israeli Economy (percentage of GDP, *) % *First half of *Goods and Services. Source: National accounts, CBS.

10 10 Current Account of Balance of Payments Current Account of Balance of Payments as Percentage of GDP, * (Annual) * First half of * Foreign Currency Department forecast SOURCE: Balance of Payments, Central Bureau of Statistics.

11 11 Non-Monetary Policy Issues

12 12 Non Monetary Policy Issues: Bank supervision Labor dispute Reorganization New law Economic advisor to the government

13 13 Monetary Policy Issues

14 14 Volatility of Inflation and the Exchange Rate, USAUKMexicoChileBrazilIsrael 0.90%0.72%2.25%1.13%3.60%2.68% Inflation a 2.33% c 2.01%1.66%2.30%3.76%1.76% Exchange Rate b a SD of 12 months inflation. b SD of monthly depreciation against the US$. C US$ against synthetic €.

15 15 Responses to FX and to Monetary Shocks

16 16 Impulse Response to an FX Shock Quarterly model of BoI Monetary Department * Shock of 1 percentage point. * Immediate pass-through to inflation is about one third (FX-level, Inflation-annualized!). * Complete (though gradual) pass-through. SOURCE: Bank of Israel – Monetary department.

17 17 * Shock of 1 percentage point. SOURCE: Bank of Israel – Monetary department. Impulse Response to an Interest Rate Shock Quarterly model of BoI Monetary Department

18 18 SOURCE: Bank of Israel – Monetary and Research departments. Impulse Response to an FX Shock VAR(2)

19 19 Impulse Response to an Interest Rate Shock (VAR(2)) SOURCE: Bank of Israel – Monetary and Research departments.

20 20 Dealing with Inflation Volatility: Core inflation or local price inflation Remove only housing from headline Inflation Change the law Let nature and good performance do their work

21 21 The Exchange Rate: Frequent pressures for intervention Stronger shekel or weaker dollar – setting out the facts Fiscal policy Does the interest rate react to the exchange rate?

22 22 Asset Prices: Not our issue so far Responsibility for financial stability What to do in the case of irrational exuberance?

23 23 Interest Rate Smoothing: Why? Publishing: Inflation forecasts Interest Rate forecasts Biases, hints about future decisions

24 24 Interest Rate Policy: The Taylor Rule

25 25 The Estimated Equation Variables: BoI interest rate. Inflation target (Average of next 12 months). Output gap. Nominal FX w.r.t. the US$. CPI Inflation. Expectations. Operators: Difference.

26 26 Estimated Policy Rule of BoI ; monthly frequency * Estimation accounts for AR(1) process of the residuals.

27 27 The Estimated Equation Ilek Alex (2006) Variables: BoI interest rate. Inflation target (Average of next 12 months). Output gap. Nominal FX w.r.t. the US$. CPI Inflation. Expectations. Operators: Difference. “Natural” real rate of interest.

28 28 Estimated Policy Rule of BoI ; monthly frequency ; Ilek (2006)

29 29 Thank you


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