Front Matter Page
© 2006 International Monetary Fund
March 2006
IMF Country Report No. 06/121
Israel: Selected Issues
This Selected Issues paper for Israel was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on February 27, 2006. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of Israel or the Executive Board of the IMF.
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Front Matter Page
INTERNATIONAL MONETARY FUND
ISRAEL
Selected Issues
Prepared by Rick Haas, Natan Epstein, MariaLuz Moreno-Badia (EUR), Selim Elekdag, Douglas Laxton (RES), Philippe Karam (INS), Jonathan Fiechter, Michael Moore (MFD) and Richard Pratt, David Rose (Consultants)
Approved by European Department
February 27, 2006
Contents
I. Corporate Balance Sheets and Investment: Empirical Estimates for Israel
A. Introduction
B. Literature
C. Empirical Model
D. Data
E. Results
Basic Specification
Does Size Matter
Asymmetric Balance Sheet Effects
Threshold Effects
F. Investment Outlook
G. Conclusions
Figures
1. Corporate Leverage
2. Mean Values by Year, 1995–2003
3. Mean Values by Industry, 1995–2003
4. Mean Values by Firm Size, 1995–2003
5. Financial Strength of the Business Sector, 1999–2005
Tables
1. Sample Information for Israeli firms
2. Summary Statistics
3. Balance Sheet Indicators and the Investment-Capital ratio (Error-Correction Model)
4. Balance Sheet Indicators and the Investment-Capital ratio (Euler Equation Model)
5. Balance Sheet Indicators and the Investment-Capital ratio, Controlling for Size (Error-correction Model)
6. Balance Sheet Indicators and the Investment Capital Ratio, controlling for Size (Euler Equation)
7. Asymmetric Effects over Real Sector Downturns (Error-correction Model)
8. Asymmetric Effects over Real Sector Downturns (Euler Equation Model)
9. Asymmetric Effects over Equity Price Cycle (Error-correction Model)
10. Asymmetric Effects over Equity Price Cycle (Euler Equation Model)
11. Threshold Effects (Error-correction Model)
12. Threshold Effects (Euler-Equation Model)
Appendix
1. Data Sources and Definitions
References
II. Fiscal Policy in Israel: Trends and Prospects
A. Introduction
B. Fiscal Performance since 1985
Trends
How does Israel Compare with OECD Countries
C. Assessing the Stance of Fiscal Policy
Medium Term
Impact of Aging
Negative Income Tax
D. Fiscal Consolidation: Now Versus Later
E. Tax Cuts
F. Conclusion
Figures
1. General Government Finances
2. International Comparison: General Government Finances, 1995–2004
3. Tax Revenues, 2003
4. Public Debt sustainability: Bound Tests
5. Effects of Fiscal Consolidation on Real GDP, 2005–45
6. Cumulative Effects on Real GDP of Reducing Transfers and Cutting Taxes, 2005–45
Tables
1. Central Government: DRL Ceiling Versus Actual Deficits
2. Trends in Public Finances
Appendix
1. Public Sector Debt Sustainability Framework, 2000–10
2. Negative Income Tax
References
III. A Simple Forecasting and Policy Analysis System for Israel Structure and Applications
A. Introduction
B. Some Monetary History
C. The Model
Output Gap Equation
Phillips Curve
Exchange Rate
Monetary Policy Rule
The Supply Side
The Rest of the World (United States)
D. Calibrating the Model and its Properties
E. Using the Model for Forecasting and Policy Analysis
F. Baseline Analysis
External Conditions
US Economy
Baseline Scenario for Israel
G. Risk Analysis
A Temporary Increase in the Price of Oil
An Increase in Foreign Demand
An Increase in Domestic Demand
An Exogenous Depreciation of the Sheqel
H. Conclusions and Future Work
Figures
1. Real GDP Growth, 1980–2005
2. NIS/$ Exchange Rate, Headline Inflation, and Bank of Israel’s Policy Rate 1996–2003
3. NIS/$ Exchange Rate, Headline Inflation, LT Inflation Expectations, and Bank of Israel’s Policy Rate 2001–05
Tables
1. United States Baseline Forecast on December 10, 2005
2. Baseline Forecast on December 10, 2005
3. Temporary 50 Percent Increase in Oil Price
4. United States Results for Positive United States Demand Shock
5. Results for Positive US Demand Shock
6. Results for Positive Demand Shock
7. Results for Sheqel Depreciation Shock
References
IV. The Reform of the Capital Markets in Israel
A. The Capital Markets in Israel
B. Concern about the Dominance of Banks in the Financial System
C. The Enactment of the Inter Ministerial Committee Recommendations
D. The Removal of Barriers to the Development of the Capital Markets
E. The Recent Growth of the Capital Markets
F. The Risks Created by Capital Market Development
G. The Response by the Regulatory Authorities
H. Further Measures to be Considered
I. Summary and Conclusions
Tables
1. Market Share of the Leading Entities According to Activity Area (December 2003)
2. Share of Banks in supply of Credit
3. Estimated Distribution of Financial Sector Assets 2003
4. Distribution of Israeli Public Assets
V. Banking Sector Developments and Issues
A. Structure and Performance of the Israeli Banking System
B. Supervision and Regulation
Supervisory Priorities
Anti-Money Laundering (AML)
Introduction of the Basel II Capital Adequacy Framework
Introduction of Explicit Deposit Insurance
Accounting and Financial Reporting
Consumer Protection
C. Conclusion
Tables
1. Banking System (Financial information in NIS, Consolidated banking group at September 30, 2005)