Inflation, Unemployment, the Exchange Rate, and Monetary Policy in Israel, 1990–99: A SVAR Approach
29 Pages Posted: 7 Nov 2012
Date Written: 2003
Abstract
In this paper we examine the effect of monetary policy on the Israeli economy, and in particular on unemployment and the evolution of prices, for the period between 1990 and 1999, using the SVAR methodology. The four endogenous variables are the unemployment rate in deviations from its trend, the inflation rate, the Bank of Israel nominal interest rate and local-currency depreciation. We posit two models. In the first the identification restrictions imply that aggregate supply does not respond immediately to changes in aggregate demand, while in the second the aggregate supply response to demand shocks has been designed to have the maximum effect. The impulse response function analysis in both models indicates that an unexpected tightening of monetary policy is followed by a relatively fast slowdown in the inflation rate and a rise in the unemployment rate. This result differs from the findings in other empirical work concerning relatively large closed economies in which prices respond with a delay to policy changes, lagging behind the output response.
The analysis of the actual structural shocks during the period surveyed indicates that supply shocks are the main reason why unemployment deviates from its long-term level. The contribution of monetary policy shocks to the evolution of unemployment between 1993 and 1994 and after 1997 in the context of the second model is in line with existing appraisals of monetary policy, according to which it was loose in the first sub-period and tighter in the second one. It may therefore be inferred that this model, which is characterized by nominal frictions, is more suitable for describing Israel’s economy during the estimation period.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Sources of Unemployment Fluctuations: An Empirical Application to the Italian Case
By Silvia Fabiani, Alberto Locarno, ...
-
Beyond National Institutions: Labor Taxes and Regional Unemployment in Italy
By Giorgio Brunello, Claudio Lupi, ...
-
Economic Performance and Unemployment: Evidence from an Emerging Economy - Turkey
By Hakan Berument, Nukhet Dogan, ...
-
Monetary Policy and Swedish Unemployment Fluctuations
By Annika Alexius and Bertil Holmlund
-
Monetary Policy and Swedish Unemployment Fluctuations
By Annika Alexius and Bertil Holmlund
-
Monetary Policy and Swedish Unemployment Fluctuations
By Annika Alexius and Bertil Holmlund
-
Recent Macroeconomic Performance in Colombia: What Went Wrong?
-
Macroeconomic Policy and Unemployment by Economic Activity: Evidence from Turkey
By Hakan Berument, Nukhet Dogan, ...
-
Macroeconomic Policy and Unemployment by Economic Activity: Evidence from Turkey
By Hakan Berument, Nukhet Dogan, ...