Rethinking Exchange Rate Policy in a Small Open Economy: The Israeli Experience During the Great Recession

16 Pages Posted: 6 Oct 2014

Date Written: October 2013

Abstract

In this paper we describe and analyze the intervention by the Bank of Israel (BOI) in the foreign exchange market during 2008-11. The purchases started in March 2008 with a fixed daily amount of $25 million, and were increased in July to a daily amount of $100 million. In August 2009, the BOI announced that it would cease to purchase a fixed daily amount, but that it could intervene in case of fluctuations in the exchange rate that it judged to be inconsistent with fundamental economic forces. Thus, between August 2009 and July 2011, the BOI occasionally purchased foreign exchange. The initial motivation was the assessment that the foreign exchange reserves needed to be increased. The timing was chosen following a period of rapid appreciation deemed inconsistent with Israeli economic fundamentals. The continued intervention during the recession was aimed at offsetting the forces for appreciation against the background of a sharp drop in demand for Israeli exports. We show that the intervention moderated the over-appreciation of the shekel during part of the period, and thus helped mitigate the negative effects of the global crisis on Israeli exports and growth. The experience of Israel and other economies also supports the upward revision of the level of reserves that is considered adequate.

Full publication: Market Volatility and Foreign Exchange Intervention in EMEs: What Has Changed?

Keywords: foreign exchange intervention, foreign exchange reserves, exchange rate

JEL Classification: F31, E58

Suggested Citation

Flug, Karnit and Shpitzer, Amir, Rethinking Exchange Rate Policy in a Small Open Economy: The Israeli Experience During the Great Recession (October 2013). BIS Paper No. 73n, Available at SSRN: https://ssrn.com/abstract=2474000

Karnit Flug (Contact Author)

Bank of Israel ( email )

P.O. Box 780
Jerusalem, 91907
Israel

Amir Shpitzer

Bank of Israel

P.O. Box 780
Jerusalem, 91907
Israel

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