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Bufman, G., Leiderman, L. and M. Sokoler (1995): “Israel’s Experience with Explicit Inflation Targets”. In Leiderman L. and L. Svensson (eds), “Inflation Targets”, CEPR.
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I am grateful to Mike Artis, Eric Clifton, and Fabio Scacciavillani for useful comments and discussions. All the remaining errors are mine.
See Mishkin (1996) for a discussion of the possible transmission mechanisms from monetary policy to real activity.
See Bufman and Leiderman (1997), and Bufman, Leiderman and Sokoler (1995) for a discussion of monetary policy, inflation targeting, and exchange rate regimes in Israel.
Here onwards referred to as R&R.
Fair (1989) argues that the estimation of structural models is an alternative to the narrative approach, since it can identify the direction of causation. Using the “structural approach” he analyses the six monetary shocks considered by R&R, and obtains similar results, although the average size and persistence of the effects is found to be smaller.
Despite the similarity with the methodology used in Romer and Romer (1989, 1990), differences arise in the variables considered, in the transformation used, and in the lag structure of the regressions.
The sample selection is restricted by the presence of several structural shifts in the data before 1990, in correspondence with the high inflation episode, the financial liberalization reforms, and the period of large immigration flows.
Monetary shocks are selected on the basis of what is reported in the Annual Reports and in the Recent Economic Developments bulletins of the Bank of Israel, and in the Recent Economic Developments reports of the IMF.
Section II.A identifies the first shock in October 1991, while the inflation target was officially introduced in December 1991. Hence, our definition does not apply to the first episode. However, we think that there is little room for judgment errors in the interpretation of the authorities’ intent for that particular episode. Inflation increased from 17.6 percent in April 1991 to 21.6 percent in August of the same year, while the inflation target was set at 14–15 percent just three months later.
Throughout the empirical analysis we use seasonally adjusted data, when available. When they are not, a seasonal adjustment is performed according to a multiplicative ratio to moving average method.
The comparison is carried over 11 months, since the sample ends 11 months after the shock of May 1996.
Throughout the econometric analysis it is checked that the inclusion of 18 lags in the regressions is sufficient to eliminate residual correlation.
Recursive estimation of the “normal” path could account for instability of the coefficients. Nonetheless, the relatively short sample would result in poor estimates, particularly over the first years of the sample.
Real balances are built as the ratio between M1 and the consumer price index.
Data on trade deficit exclude ships, aircraft and diamonds.
Dynamic forecasts are run for 18 periods after the first two shocks, and for 11 periods after the last shock. The shorter horizon of the last forecast is due to the fact that the last episode is identified in May 1996, and data are available only until April 1997.
Notice that one should pay attention to both Regressions I and II. Regression I suffers from the limitations of univariate models, where it is assumed that a variable can completely be explained by its own past. The advantage of Regression II is that, by includingoutput, one can draw conclusions on which movements in the variables of interest are onlydue to the monetary shock. However, a problem of endogeneity might arise in the estimation of equation (7), if output in turn reacts to movements Xt. Therefore results from Regressions I and II should be interpreted in relation to each other.
Monthly data are available from the Central Bureau of Statistics for the aggregate industrial production index and for each industrial sector’s production index.
The index of exposure is calculated as the end of period ratio of each sector’sexports to its production. Gross exports by sector are found in the Central Bureau of Statistics. Since data for industrial production are only available as indices, we calculatesectoral output in 1993 by using data from the Statistical Abstract for 1996. Output is given by the average annual product per employee in each sector, multiplied by the months’ average number of employees in the same sector.
In the text, forecast errors are converted to percent by multiplying the figures reported in the tables by 100.
The sector aggregates communication, control, medical and scientific equipment, and electronic components, office machines and computers.
Seasonally unadjusted monthly data are available from the International Financial Statistics until November 1996, and from the Monthly Bulletin of Statistics thereafter.
Monthly data are available from the Bank of Israel for total credit to the private sector through the banking system, and for credit to the public through the banking system in domestic and in foreign currency.
Source: International Financial Statistics, National Accounts.
Monthly data are available from the International Financial Statistics for the nominal and the real exchange rate, and from the Central Bureau of Statistics for the trade balance (excluding ships, aircraft and diamonds).
From the widening of the band in June 1995 until the subsequent band expansion in mid 1997, the central bank has sharply increased intra-marginal intervention, to counteract the appreciating trend of the nominal exchange rate. While foreign reserves were US$7.4 billion at the end of 1994, they became respectively US$8.7 billion, US$11 billion at the end of the following two years, and US$17 billion during the first half of 1997.