Policy
Chapters and Reports
2023
Labour market tightness and inflation in the aftermath of Covid-19: The case of Israel
With: Andrew Abir and Eyal Argov
Published in Inflation and Labour Markets, Bank for International Settlements
Abstract: This study examines the impact of Israel's labour market recovery from the Covid-19 crisis on inflation. The Covid-19 crisis significantly impacted the labour market, with a peak unemployment rate of 36% in April 2020. In response, the government implemented a full furlough programme and a safety net programme. By the end of 2021, the labour market had fully recovered, with employment and unemployment rates returning to pre-Covid-19 levels. Tight labour markets transmit inflation via wage increases, pushing inflation through the income and cost channels. However, we find that the effect of wages on inflation is not dominant for two main reasons. First, the concentration of wage increases was in industries that do not serve domestic private consumption. Second, public wages remained stagnant due to public sector wage negotiations and delays in reaching agreements.
2022
Has the curve flattened? The relationship between activity and inflation in Israel in the last decades
With: Sigal Ribon
Published in Monetary Policy in a Period of Price Stability, Bank of Israel, Bank of Israel (In Hebrew)
Abstract: The Phillips Curve, a key macroeconomic framework, has been questioned due to weakening inflation-output correlations globally and in Israel. This study estimates the "Phillips multiplier" - the ratio of inflation to real activity responses following an exogenous aggregate demand shock - using various identification methods. We find evidence of a Phillips Curve in Israel, with a flattening trend over the past decade. The multiplier averaged between 1 and 2 from 2003-2019, higher in the earlier years and lower later, coinciding with declining inflation. However, estimation uncertainty limits precise quantification of this relationship and its changes. These findings have significant implications for monetary policy decisions.
2018
Measuring the importance of global factors in determining inflation in Israel
With: Nadine Baudot-Trajtenberg
Published in Globalisation and Deglobalisation, Bank for International Settlements
Abstract: This paper presents evidence that inflation in Israel and many OECD member states was driven largely by global factors during 2009-17. In particular, inflation in Israel was strongly correlated with that in most OECD countries in the review period of January 2009-June 2017. Furthermore, the development of inflation in most OECD countries is captured well using a model that includes two unobserved common factors. The first two factors that explain most of the co-movement in inflation among OECD countries explain roughly 80% of the variance in Israel's headline as well as core (ie excluding food and energy) inflation rates during the review period. This finding emphasises the broad-based importance of global factors in determining inflation in Israel. We find that the first factor correlates with oil prices and the trade-weighted USD exchange rate index (the DXY), but this alone does not fully explain the strong cross-country correlation - due to the importance of the second factor. These findings emphasise the importance of analysing global inflation developments as a tool for understanding headline inflation in Israel as well as its subcomponents, and may contribute to a better understanding of monetary policy measures taken in the period reviewed.
Chapter 3: Monetary policy and inflation
Analysis of monetary policy and inflation trends in Israel for the year 2018.
Published in Bank of Israel Annual Report 2018, Bank of Israel
2017
Chapter 3: Monetary policy and inflation
Analysis of monetary policy and inflation trends in Israel for the year 2017.
Published in Bank of Israel Annual Report 2017, Bank of Israel
Policy Briefs
2024
War's effect on food prices
With: Alon Eizenberg
Published as a special report by the Bank of Israel (in Hebrew)
Abstract: This analysis examines the "Iron Swords" war's impact on Israeli relative prices, focusing on the food sector. It considers changes in demand patterns and supply factors like cost structures and market power. The study concludes that the war is likely to create upward pressure on food prices in the short to medium term. Initial data from credit card spending and a new daily food price index support this conclusion.
2023
The effect of geopolitical shocks on inflation, 1995-2022
Published in Bank of Israel Annual Report 2023 (Box 3.1.)
Abstract: This box examines how the geopolitical shocks that took place in Israel between 1995 and 2022 influenced inflation, the exchange rate, and the monetary interest rate. The findings show that these shocks had only a temporary impact on the price level, in parallel with a slight and temporary increase in the monetary interest rate and a temporary depreciation of the shekel.
2020
Inflation during the Coronavirus pandemic: Challenges in measurement and interpretation
With: Yitzhak Shizgel
Published in Bank of Israel Monetary Policy Report First Half of 2020 (Box A.2.)
Abstract: The coronavirus pandemic has complicated inflation measurement and interpretation. Shifts in consumption patterns, missing data, quality changes in goods, and altered purchasing methods are distorting official inflation figures. Consequently, the Central Bureau of Statistics' reported inflation likely underestimates the rate relevant to policymakers. For a more accurate assessment of underlying inflation, economic analysts should consider core indices, current consumption-weighted measures, and inflation expectations alongside official data.
Initial economic insights from indices of changes in mobility patterns in Israel
Published as a special report by the Bank of Israel
Abstract: Google and Apple's "Mobility reports" track population movements, indicating labor and consumption trends. These reports showed severe drops in Israeli workplace (70%) and retail/recreation (80%) mobility during coronavirus lockdowns. Late April saw improvements following eased restrictions. Initially, Israel's mobility declined more than most OECD countries, but this gap narrowed from mid-April, suggesting a potentially faster economic recovery.
2017
Global factors and their contribution to inflation in Israel
Published in Bank of Israel Annual Report 2017 (BOX 3.1.)
Abstract: Since the Global Financial Crisis, global factors have increasingly influenced inflation, explaining over 70% of OECD inflation variance and 80% in Israel. These factors accurately account for Israel's sharp inflation decline in 2011-2016 and its subsequent reversal, contributing significantly to Israel's inflation in the past 18 months. OECD countries' inflation rates have become more correlated during this period.
2016
The factors affecting the development of inflation in Israel in the short-run
Published in Bank of Israel Annual Report 2016 (Box 3.2.)
Abstract: The Phillips Curve model for Israel considers inflation expectations, supply shocks, resource utilization, and import prices. Estimates show strong influences from expectations and past inflation, while the output gap's effect is positive but often insignificant. External factors impact inflation, but less over time. These findings emphasize the importance of managing expectations in monetary policy and highlight challenges from the curve's flattening slope.