Endogenous Monetary Policy Credibility in a Small Macro Model of Israel
IMF Working Papers, August 1, 2007
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- Endogenous Monetary Policy Credibility in a Small Macro Model of Israel
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Bibliographic details
- Authors: Eyal Argov, David Rose, Philippe D Karam, Natan P. Epstein, Douglas Laxton
- Published: August 1, 2007
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451867718.001
Summary and research objective
- Extends a small linear model of the Israeli economy to allow for nonlinearities in the inflation-output process arising from:
- convexity in the Phillips curve, and
- endogenous monetary policy credibility.
- Research finding: the dynamic responses to shocks in the extended model more closely resemble features in the data from the period 2001?03.
- Specific improvement: the extended model does a much better job in accounting for the deterioration in monetary policy credibility and the output costs of regaining monetary policy credibility once it has been lost.
Model features and analytical focus
- Introduces nonlinearities in the inflation-output relationship driven by Phillips curve convexity.
- Incorporates endogenous monetary policy credibility as a state-dependent mechanism affecting inflation-output dynamics.
- Emphasis on matching dynamic responses to shocks with observed behavior in the 2001?03 Israeli data.
Key findings
- The extended model produces dynamic responses to shocks that are closer to observed data from 2001?03 compared with the original small linear model.
- The model notably improves accounting for:
- deterioration in monetary policy credibility, and
- the output costs associated with regaining monetary policy credibility after it has been lost.
Subjects and keywords
- Subject: Central bank policy rate, Exchange rates, Inflation, Inflation targeting, Output gap
- Keywords: exchange rate, WP