A Peek into the Governor's Chamber: The Israeli Case

30 Pages Posted: 13 Jan 2003

See all articles by Rafi Melnick

Rafi Melnick

Interdisciplinary Center Herzliya

Date Written: August 2002

Abstract

The paper analyzes the rule used by the Bank of Israel (BoI) to set the interest rate from mid-1993 till the end of 2001, after relative price stability had been achieved. Our approach follows the analytical framework developed since the influential contribution of Taylor (1993). We compare three policy type rules, the classic Taylor type, the interest rate parity type and the domestic real interest rate type. We give a positive answer to the question; can the path of the interest rate in Israel be explained by a well-defined policy rule? and conclude that the BoI followed a strict, forward-looking rule with smoothing based on interest rate parity considerations, including strong reaction to exchange-rate shocks. The success of reducing inflation by applying extremely tight monetary policy is exemplified in the Israeli case allthough our analysis shows that the disinflation process was not fully completed in the sense that the rate of interest did not return to a steady state level consistent with low inflation and low real rates of interest.

Keywords: policy rule, interest rate, disinflation, Bank of Israel

JEL Classification: E52, E58

Suggested Citation

Melnick, Rafi, A Peek into the Governor's Chamber: The Israeli Case (August 2002). Available at SSRN: https://ssrn.com/abstract=349924 or http://dx.doi.org/10.2139/ssrn.349924

Rafi Melnick (Contact Author)

Interdisciplinary Center Herzliya ( email )

P.O. Box 167
Herzliya, 4610101
Israel