Monetary Policy Issues in Israel Stanley Fischer Bank of Israel Prepared for Presentation at the Research Conference 1 of the Central Bank of Chile, November 15 -16 2007
Economic Performance 2
Growth Rate of GDP 2000 -2007 % BI- Forecast 3
Budget Deficit* % (percentage of GDP, 2000 -2007) Under the assumption that the budget is fully performed 4 *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.
Public Sector Debt, Percentage of GDP, 2000 -2007 (year-end) % 5
Rate of Inflation in Last 12 Months and Inflation Targets, 1992 -2007 % 6
Bank of Israel Interest Rate, Inflation Expectations*, and the Fed’s interest Rate, 2004 -2007 % 7 *For 12 months, as derived from the capital market.
The Nominal and the Real Exchange Rate 2007 - 1997 NIS Shekel / Dollar Exchange Rate The Real Exchange Rate by Trading Partners (100=01/1997, 01/1997 -11/2007) 127. 6 • 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. 8 *The Nis/$ chart is on a daily basis, while the real exchange rate chart is on a monthly basis.
Openness of the Israeli Economy (percentage of GDP, 1995 -2007*) % *First half of 2007. 9 *Goods and Services. Source: National accounts, CBS.
Current Account of Balance of Payments as Percentage of GDP, 1995 -2007* (Annual) * First half of 2007. 10 * Foreign Currency Department forecast • SOURCE: Balance of Payments, Central Bureau of Statistics.
Non-Monetary Policy Issues 11
Non Monetary Policy Issues: • • • 12 Bank supervision Labor dispute Reorganization New law Economic advisor to the government
Monetary Policy Issues 13
Volatility of Inflation and the Exchange Rate, 1997. 1 -2007. 7 Israel Brazil Chile Mexico UK USA Inflationa 2. 68% 3. 60% 1. 13% 2. 25% 0. 72% 0. 90% Exchange Rateb 1. 76% 3. 76% 2. 30% 1. 66% 2. 01% 2. 33%c a SD b of 12 months inflation. SD 14 monthly depreciation against the US$. of C US$ against synthetic €.
Responses to FX and to Monetary Shocks 15
Impulse Response to an FX Shock Quarterly model of Bo. I Monetary Department * Shock of 1 percentage point. * Immediate pass-through to inflation is about one third (FX-level, Inflation-annualized!). 16 * Complete (though gradual) pass-through. SOURCE: Bank of Israel – Monetary department.
Impulse Response to an Interest Rate Shock Quarterly model of Bo. I Monetary Department 17 * Shock of 1 percentage point. SOURCE: Bank of Israel – Monetary department.
Impulse Response to an FX Shock VAR(2) SOURCE: Bank of Israel – Monetary and Research departments. 18
Impulse Response to an Interest Rate Shock (VAR(2)) 19 SOURCE: Bank of Israel – Monetary and Research departments.
Dealing with Inflation Volatility: • • 20 Core inflation or local price inflation Remove only housing from headline Inflation Change the law Let nature and good performance do their work
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? 21
Asset Prices: • Not our issue so far • Responsibility for financial stability • What to do in the case of irrational exuberance? 22
Interest Rate Smoothing: • Why? Publishing: • Inflation forecasts • Interest Rate forecasts • Biases, hints about future decisions 23
Interest Rate Policy: The Taylor Rule 24
The Estimated Equation Variables: Bo. I interest rate. Inflation target (Average of next 12 months). Operators: CPI Inflation. Expectations. Output gap. Difference. Nominal FX w. r. t. the US$. 25
Estimated Policy Rule of Bo. I 1999. 01 -2007. 09 ; monthly frequency * Estimation accounts for AR(1) process of the residuals. 26
The Estimated Equation Ilek Alex (2006) Variables: Operators: Bo. I interest rate. CPI Inflation. Expectations. “Natural” real rate of interest. Output gap. Difference. Inflation target (Average of next 12 months). 27 Nominal FX w. r. t. the US$.
Estimated Policy Rule of Bo. I 1997. 10 -2006. 04 ; monthly frequency ; Ilek (2006) 28
Thank you 29
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