Causality BetCausality between inflation and inflationween Inflation and Inflation
Challenges faced by Advanced Inflation Targeters · 2018. 7. 30. · Challenges faced by Advanced...
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Challenges faced by Advanced Inflation Targeters:
The Case of Israel
Karnit FlugBank of Israel
Prepared for a Conference at the Czech National Bank,April 8 2008
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Economic Performance of the Israeli Economy
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GDP and Business-Sector Product)*1995-2008 (
6.6
5.4
2.8
4.2
2.9
8.9
-0.4 -0.6
2.3
5.2 5.3 5.2 5.3
3.2
8.5
6.6
3.0
4.9
2.8
11.3
-1.7-2.5
3.2
7.26.5 6.5 6.1
3.6
-5
-3
-1
1
3
5
7
9
11
13
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008F
GDP Business-sector product
•SOURCE: Central Bureau of Statistics.* BOI Forecast.
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%
1.6
2.93.0
3.83.2
2.9 2.83.1
3.6
1.8
3.9
3.0
4.0
3.4
0.0
0.9
4.24.0
3.2 3.1 3.2
0.7
4.4
3.8
5.4
3.6
1.9
0
1
2
3
4
5
6
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005* 2006 2007 2008
Deficit Target Actual Deficit
Budget Deficit**(percentage of GDP, 1995-2007)
*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.
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Public Sector Debt,Percentage of GDP, 1995-2007 (year-end)
104.5 102.6 101.8 103.397.5
87.191.9
99.8 101.7 99.995.7
86.680.6
0
20
40
60
80
100
120
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
%
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Rate of Unemployment1995-2007 (Annual)
%
SOURCE: Based on Central Bureau of Statistics Labour Force Survey.
6.8 6.6
7.6
8.69.0 8.8
9.3
10.310.7 10.4
9.08.4
7.3
0
3
6
9
12
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
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-5.1 -5.0
-3.1
-0.9-1.4
-0.8 -1.1 -0.8
1.2
2.43.3 3.1
6.0
-6
-4
-2
0
2
4
6
819
95
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Current Account of Balance of Paymentsas Percentage of GDP, 1995-2007 (Annual)
•SOURCE: Balance of Payments, Central Bureau of Statistics.
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Investment in Israel by Nonresidents(as percentage of GDP, 2000-2007)
Investment of Israeli Residents Abroad(as percentage of GDP, 2000-2007)
02468
101214161820
2000 2001 2002 2003 2004 2005 2006 2007
Direct investment Portfolio investment
0235689
1112141517
2000 2001 2002 2003 2004 2005 2006 2007
Direct investment Portfolio investment
SOURCE: Central Bureau of Statistics, Balance of Payments.
%
%
8,798
14,694
4,868
4,2177,251
2,0123,822
1,812
1,767
7233,626
755,062
5,058
9,790
14,9928,244
2,9414,548
2,381
2,0653,1542,708
9821,623
688
2,1493,336
270
10,276
6,649
7,064
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Monetary Policy Regime
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NIS/Currency-Basket Exchange RateNIS
0
1
2
3
4
5
6
7
8
08/8
6
08/8
7
08/8
8
08/8
9
08/9
0
08/9
1
08/9
2
08/9
3
08/9
4
08/9
5
08/9
6
08/9
7
08/9
8
08/9
9
08/0
0
08/0
1
08/0
2
08/0
3
08/0
4
08/0
5
08/0
6
08/0
7
Declaration of IT
Full-fledge ITAdoption
of IT
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Inflation and Inflation Targets
1-32006
1-320041-32005
1-32007
Inflation Targets
1-320032-32002
2.5 - 3.520013-4200041999
7-1019987-1019978-1019968-111995
81994101993
14-151992
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0
1
2
3
4
5
6
7
Austra
liaIce
land
United
Kingdo
mIsr
ael
Norway
New Zea
land
Spain
Finland
Korea
Canad
aSwed
enTha
iland
Columbia
Czech
Rep
ublic
Chille
PeruPhil
ippines
Poland
Mexico
Hungary
South A
frica
Brazil
Target Center
Developing Countries Developed Countries
Inflation Targets in the WorldA
nnua
l Inf
latio
n Ta
rget
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Monetary Policy
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Rate of Inflation in Last 12 Months, Inflation Rate of Inflation in Last 12 Months, Inflation Expectations* and Inflation Targets, Expectations* and Inflation Targets, 19941994--20082008
-3
-1
1
3
5
7
9
11
13
15
17
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Inflation during previous 12 months
Inflation target
%
-3
-1
1
3
5
7
9
11
13
15
17
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
*For 12 months, as derived from the capital market.
Inflation Expectations
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-5
0
5
10
15
20
01/9
406
/94
11/9
404
/95
09/9
502
/96
07/9
612
/96
05/9
710
/97
03/9
808
/98
01/9
906
/99
11/9
904
/00
09/0
002
/01
07/0
112
/01
05/0
210
/02
03/0
308
/03
01/0
406
/04
11/0
404
/05
09/0
502
/06
07/0
612
/06
05/0
710
/07
03/0
8
Bank of Israel interest rate
Actual Inflation
%
Bank of Israel Interest Rate, and Actual Bank of Israel Interest Rate, and Actual Inflation*, Inflation*, 19941994--20082008
*In last 12 months.
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Bank of Israel Interest Rate, Inflation Bank of Israel Interest Rate, Inflation Expectations*, and the FedExpectations*, and the Fed’’s interest Rate, s interest Rate,
19941994--20082008
0
2
4
6
8
10
12
14
16
18
01/9
406
/94
11/9
404
/95
09/9
502
/96
07/9
612
/96
05/9
710
/97
03/9
808
/98
01/9
906
/99
11/9
904
/00
09/0
002
/01
07/0
112
/01
05/0
210
/02
03/0
308
/03
01/0
406
/04
11/0
404
/05
09/0
502
/06
07/0
612
/06
05/0
710
/07
03/0
8
Bank of Israel interest rate
Fed's interest rate
%
*For 12 months, as derived from the capital market.
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Challenges
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-5-4-3-2-101234567 Deviations from above Deviations from below
Rate of Inflation in Last 12 Months Inflation Targets
2003 2004 2005 2006
%
Rate of Inflation in Last 12 Months, Rate of Inflation in Last 12 Months, Inflation Targets and Deviations from Inflation Targets,Inflation Targets and Deviations from Inflation Targets,
20032003--20082008
2007
2008
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Price Index and Shekel/Dollar Exchange Rate )Rate of change over 12 months, up to February 2008(
-4
-2
0
2
4
6
8
10
12
01/97
07/97
01/98
07/98
01/99
07/99
01/00
07/00
01/01
07/01
01/02
07/02
01/03
07/03
01/04
07/04
01/05
07/05
01/06
07/06
01/07
07/07
01/08
Percent
-16
-11
-6
-1
4
9
14
19Price index Exchange rate
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Pass-Through from Exchange Rate to Prices:International Evidence and the Israeli Experience
Source: Choudhri and Hakura (2003) and bank of Israel estimetes
0.50.3Israel0.20.15Emerging Markets0.10.05Developed Economies
Over 1 YearOver 1 Quarter
In the second half of 2007 the Pass-Through has dropped sharply.
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Volatility of the Exchange Rate in Israel and in Developed and Developing Countries
1997-2007
00.5
11.5
22.5
33.5
44.5
5
Singapore
Canada
Israe
lMex
icoUnite
d Kingdom
ChileUnite
d Stat
esNorw
aySwed
enPolandIce
land
Czech
Repub
licSouth A
frica
Korea
Developing CountriesDeveloped Countries
a SD of monthly depreciation against the US$. For US - US$ against synthetic €.
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Volatility of Inflation in Israel and in Developed and Developing Countries
1997-2007
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
USACanad
a UK
ChilleSwed
enSingap
urNorw
aySouth A
frica
Korea
Mexico
Israe
lPolandIce
land
Czech
Repub
lic
Developing CountriesDeveloped Countries
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Commodities and Oil Prices)06 /2001-03/2008 ,100=06/2001 (
0
50
100
150
200
250
300
350
400
Jun-01
Dec-01
Jun-02
Dec-02
Jun-03
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
$
Oil PricesCommoditiesNon Energy Commodities
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Index of Real Exchange Rate by Trading Partners )01 /1997-03/2007 (%
•A rise in the index indicates depreciation.
•The figure for March 2008 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 November 2007 to March 2008, Bank of Israel calculations.
90
95
100
105
110
115
120
125
130
135
01/97
07/97
01/98
07/98
01/99
07/99
01/00
07/00
01/01
07/01
01/02
07/02
01/03
07/03
01/04
07/04
01/05
07/05
01/06
07/06
01/07
07/07
01/08
115.6
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Most Recent Developments:• A two day intervention (during 13-14/03/08) in FX
market where the Bank of Israel purchased FX due to disorderly sharp appreciation of the NIS.
• An announcement of the intention to purchase FX at an amount of some 25 million US$ per day over the next 2 years aimed at raising FX reserves to a more adequate level of 35-40 billion US$.
• Two consequtive reductions of interest rates for March and April by 0.5% each
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March 13-14, 2008
Shekel/Dollar
Shekel/Euro
-2.62%
-2.52%
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The Change in Foreign Exchange Reserves($,1998 - 2007)
Source: IMF
-100%-50%
0%50%
100%150%200%250%300%350%400%450%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
World Reserves OECD Non OECD Israel Eurozone OECD ex Eurozone
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Final Comment• During the Inflation Targeting Regime we
had high volatility of inflation and frequent episodes where inflation was outside the target range.
• However, expectations for inflation were always, in recent years, within the inflation target range.
• Thus, by anchoring expectations within the price stability range, inflation targeting has provided a stable environment to economic agents .
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Thank You