Disinflation in Steps and the Phillips Curve: Israel 1986-2015
44 Pages Posted: 4 Aug 2016 Last revised: 18 Jul 2017
Date Written: June 27, 2017
A Phillips Curve (PC) framework is utilized to study the challenging post-1985 disinflation process in Israel. The estimated PC is stable and has forecasting power. Based on endogenous structural break tests we find that actual and expected inflation are co-breaking. We argue that the step-like development of inflation is in line with shocks and monetary policy that changed inflationary expectations. The disinflation process was long, and a long-term commitment by both the Central Bank and the government was required. Credibility was achieved gradually and the transition from the last step of 10% to 2% inflation was accomplished by introducing an inflation targeting regime.
Keywords: Phillips Curve, Expected Inflation, Opportunistic Disinflation, Multiple Breakpoint Tests, Inflation Targeting
JEL Classification: E31, E52, E58, C22
Suggested Citation: Suggested Citation