Industry Effects of Monetary Policy in Israel – A Var Analysis
33 Pages Posted: 4 Dec 2012
Date Written: June 2009
Abstract
This study uses cross-sectional data for the years 19972006 to examine the effects of monetary policy on different manufacturing industries. The effects of interest-rate shocks and exchange-rate shocks on the amount produced and the price (to the consumer) in each of 16 industries was studied by means of a system of VAR equations that incorporated five endogenous variables - the Bank of Israel interest rate, the shekel/dollar exchange rate, labor costs per hour, price, and quantity produced. It was found that a rise in the interest rate was generally reflected in a reduction in the amount produced, in conjunction with a fall in price that expressed the effect of demand. An exchange-rate shock was reflected by a price rise in nearly all industries, usually with a cumulative decline in the amount produced. The second part of the study examines the connection between the characteristics of the different industries and their responses to interest-rate and exchange-rate shocks. It was found that the effect on demand of an interest-rate shock was greater in industries that produce consumer durables. It was also found that a price rise in response to an interest-rate increase was smaller in high-tech industries and industries in which production is concentrated in a few companies. In the concentrated industries, a temporary increase in the exchange rate is reflected to a larger extent in a rise in prices.
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