The mortgage cash-flow channel: how rising interest rates impact household consumption
With: Nadav Eshel and Nimrod Segev
[Link]
Abstract: This study investigates the impact of increased debt servicing costs on household consumption resulting from monetary policy tightening. It utilizes observational panel microdata on all mortgage holders in Israel and leverages quasi-exogenous variation in exposure to adjustable-rate mortgages (ARMs) due to a regulatory shift. Our analysis indicates that when monetary policy became more restrictive, consumers with a higher ratio of ARMs experienced a more marked reduction in their consumption patterns. This effect is predominantly observed in mid- to lower-income households and those with a higher ratio of mortgage payments to total spending. These findings highlight the substantial role of the mortgage cash-flow channel in monetary policy transmission, emphasizing its implications for economic stability and inequality.
Does guilt affect performance? Evidence from unjustified penalty calls
With: Yuval Mazar, Noam Michelson and Shay Tsur
Published in American Behavioral Scientist
[Published Version] | [Working Paper]
Abstract: Does guilt affect performance? In our study, we exploit a new measure of justification for penalty decisions in football and find that unjustified penalty calls negatively impact penalty conversion rates. This effect escalates in relation to social norms of trust. To add a layer of complexity, we incorporate the variance originating from players who do not play in their countries of origin. This allows us to include the norms of both the league and the kickers’ countries of origin. From this, we divide the constraints on egoism into two categories: internal sanctions, such as guilt, and external sanctions, such as shame. Our findings reveal that both guilt and shame significantly influence the performance of penalty kickers.
Shocks and currents: Monetary Policy and Israel’s Foreign Exchange Market
With: Amit Friedman and Sigal Ribon
Published in Comparative Economic Studies
Abstract: This paper explores the interplay between domestic and global monetary policies, capital flows, and exchange rate dynamics in Israel. Using a novel dataset of daily sectoral FX transactions, we examine the transmission of monetary shocks identified from yield curve shifts around central bank announcements. Local projections reveal that foreign financial investors respond strongly and symmetrically to domestic and foreign shocks, which suggests that they react to the interest rate differential. Domestic institutional investors counteract this by rebalancing their portfolios. In particular, the impact of US monetary shocks on Israeli institutional investors and on the exchange rate depends on the shocks’ correlation with the S&P 500 stock index. The findings contribute to a deeper understanding of the mechanisms through which domestic and global monetary policies influence small open economies like Israel, and highlight the limited monetary autonomy of small open economies even under flexible exchange rates.
Forecasting CPI inflation components with hierarchical recurrent neural networks
With: Oren Barkan, Jonathan Benchimol, Elia Cohen, Alon Hammer and Noam Koenigstein
Published in International Journal of Forecasting
[Published Version] | [Working Paper] | [Replication Files]
Abstract: We present a hierarchical architecture based on recurrent neural networks for predicting disaggregated inflation components of the Consumer Price Index (CPI). While the majority of existing research is focused on predicting headline inflation, many economic and financial institutions are interested in its partial disaggregated components. To this end, we developed the novel Hierarchical Recurrent Neural Network (HRNN) model, which utilizes information from higher levels in the CPI hierarchy to improve predictions at the more volatile lower levels. Based on a large dataset from the US CPI-U index, our evaluations indicate that the HRNN model significantly outperforms a vast array of well-known inflation prediction baselines. Our methodology and results provide additional forecasting measures and possibilities to policy and market makers on sectoral and component-specific price changes.
Double machine learning and automated confounder selection: A cautionary tale
With: Paul Hünermund and Bayers Louw
Published in Journal of Causal Inference
[Published Version] | [Working Paper]
Abstract: Double machine learning (DML) has become an increasingly popular tool for automated variable selection in high-dimensional settings. Even though the ability to deal with a large number of potential covariates can render selection-on-observables assumptions more plausible, there is at the same time a growing risk that endogenous variables are included, which would lead to the violation of conditional independence. This article demonstrates that DML is very sensitive to the inclusion of only a few “bad controls” in the covariate space. The resulting bias varies with the nature of the theoretical causal model, which raises concerns about the feasibility of selecting control variables in a data-driven way.
Measuring communication quality of interest rate announcements
With: Jonathan Benchimol and Sophia Kazinnik
Published in The Economists' Voice
[Published Version] | [Working Paper]
Abstract: We use text-mining techniques to measure the accessibility and quality of information within the texts of interest rate announcements published by the Bank of Israel over the past decade. We find that comprehension of interest rate announcements published by the Bank of Israel requires fewer years of education than interest rate announcements published by the Federal Reserve and the European Central Bank. In addition, we show that the sentiment within these announcements is aligned with economic fluctuations. We also find that textual uncertainty is correlated with the volatility of the domestic financial market.
The COVID-19 inflation weighting in Israel
With: Jonathan Benchimol and Yuval Levin
Published in The Economists' Voice
[Published Version] | [Working Paper] | [Replication Files]
Abstract: Significant shifts in the composition of consumer spending as a result of the COVID-19 crisis can complicate the interpretation of official inflation data, which are calculated by the Central Bureau of Statistics (CBS) based on a fixed basket of goods. We focus on Israel as a country that experienced three lockdowns, additional restrictions that significantly changed consumer behavior, and a successful vaccination campaign that has led to the lifting of most of these restrictions. We use credit card spending data to construct a consumption basket of goods representing the composition of household consumption during the COVID-19 period. We use this synthetic COVID-19 basket to calculate the adjusted inflation rate that should prevail during the pandemic period. We find that the differences between COVID-19-adjusted and CBS (unadjusted) inflation measures are transitory. Only the contribution of certain goods and services, particularly housing and transportation, to inflation changed significantly, especially during the first and second lockdowns. Although lockdowns and restrictions in developed countries created a significant bias in inflation weighting, the inflation bias remained unexpectedly small and transitory during the COVID-19 period in Israel.
The immediate impact and persistent effect of FX purchases on the exchange rate
With: Amit Friedman and Sigal Ribon
Published in International Journal of Central Banking
[Published Version] | [Working Paper]
Abstract: In recent years, foreign exchange (FX) interventions have been routinely used by the Bank of Israel and other central banks as an additional monetary instrument to moderate appreciation trends of the domestic currency. This paper analyzes the immediate effect of the Bank of Israel's FX interventions on the exchange rate and its persistence over time. To identify this effect, we first measure the intraday impact of FX intervention using a novel confidential, high-frequency, minute-by-minute data set of interventions between 2009 and 2017. Next, we use our measure to estimate the persistence of FX intervention shocks over longer horizons (in trading days), using local projections. We find that FX intervention shocks cause, on impact, USDILS exchange rate depreciation in over 90 percent of the cases. We also find that this effect has a persistent effect on the USDILS exchange rate for 40–60 trading days.
Date-stamping historical oil price explosivity: 1876 – 2014
With: Nico Katzke and Rangan Gupta
Published in Energy Economics
[Published Version] | [Working Paper]
Abstract: This paper sets out to date-stamp periods of historic oil price explosivity using the Generalized sup ADF (GSADF) test procedure developed by Phillips, Shi, and Yu (2013). The date-stamping procedure used in this paper is effective at identifying periodically collapsing bubbles; a feature found lacking with previous bubble detection methods. We set out to identify periods of oil price explosivity relative to the general price level and oil inventory supplies in the US since 1876 and 1920, respectively. The recursive identification algorithms used in this study identify multiple periods of price explosivity, and as such provides future researchers with a reference for studying the macroeconomic impact of historical periods of significant oil price build-ups.
Rtadf: Testing for bubbles with EViews
Published in Journal of Statistical Software
Abstract: This paper presents Rtadf (right-tail augmented Dickey-Fuller), an EViews add-in that facilitates the performance of time series based tests that help detect and date-stamp asset price bubbles. The detection strategy is based on a right-tail variation of the standard augmented Dickey-Fuller (ADF) test where the alternative hypothesis is of a mildly explosive process. Rejection of the null in each of these tests may serve as empirical evidence for an asset price bubble. The add-in implements four types of tests: standard ADF, rolling window ADF, supremum ADF (SADF; Phillips, Wu, and Yu 2011) and generalized SADF (GSADF; Phillips, Shi, and Yu 2015). It calculates the test statistics for each of the above four tests, simulates the corresponding exact finite sample critical values and p values via Monte Carlo methods, under the assumption of Gaussian innovations, and produces a graphical display of the date stamping procedure.
Testing for bubbles in stock markets with irregular dividend distribution
With: Meital Graham-Rozen
Published in Finance Research Letters
[Published Version] | [Working Paper]
Abstract: Recursive right-tailed unit root tests have recently become a popular tool to test the existence of stock price bubbles. These tests require continuous data on dividend distribution that is not always available, in particular when it comes to sectoral indexes or individual stocks. In this paper we show that it is possible to circumvent this problem by applying the test to an equity bubble using the book-to-market ratio. We illustrate our framework by testing for a bubble in the Israeli stock market, where data on continuous dividend distribution are uncommon.
Testing for a housing bubble at the national and regional level: The case of Israel
Published in Empirical Economics
[Published Version] | [Working Paper]
Abstract: Between 2008 and 2013, home prices in Israel appreciated by roughly 50 % in real terms, with increases in nearly 60 % in some regions. This paper examines whether this phenomenon reflects the presence of a national or regional housing bubble by applying econometric tests for explosive behavior to quality-adjusted national- and regional-level data on the home price to rent ratio, while controlling for various fundamental factors, including interest rates, income and the leverage ratio. Overall, study results indicate that the national- and regional-level data are inconsistent with a housing bubble scenario. Most of the results are robust to a variety of tests and alternate specifications. The framework I provide to study the Israeli case may be applied to study other housing markets facing similar developments.