Benchimol, Jonathan (2016): Money and monetary policy in Israel during the last decade. Published in: Journal of Policy Modeling , Vol. 38, No. 1 (9 February 2016): pp. 103-124.
Preview |
PDF
MPRA_paper_69587.pdf Download (1MB) | Preview |
Abstract
This study examines how money and monetary policy have influenced output and inflation during the past decade in Israel by comparing two New Keynesian DSGE models. One is a baseline separable model (Galí, 2008) and the other assumes non-separable household preferences between consumption and money (Benchimol & Fourçans, 2012). We test both models by using rolling window Bayesian estimations over the last decade (2001–2013). The results of the presented dynamic analysis show that the sensitivity of output with respect to money shocks increased during the Dot-com, Intifada, and Subprime crises. The role of monetary policy increased during these crises, especially with regard to inflation, even though the effectiveness of conventional monetary policy decreased during the Subprime crisis. In addition, the non-separable model including money provides lower forecast errors than the baseline separable model without money, while the influence of money on output fluctuations can be seen as a good predictive indicator of bank and debt risks. By impacting and monitoring households’ money holdings, policy makers could improve their forecasts and crisis management through models considering monetary aggregates.
Item Type: | MPRA Paper |
---|---|
Original Title: | Money and monetary policy in Israel during the last decade |
Language: | English |
Keywords: | Divisia monetary aggregates; Monetary policy; DSGE; Crises; Israel |
Subjects: | E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation: Models and Applications E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E51 - Money Supply ; Credit ; Money Multipliers E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies |
Item ID: | 69587 |
Depositing User: | Jonathan Benchimol |
Date Deposited: | 18 Feb 2016 12:06 |
Last Modified: | 26 Sep 2019 17:40 |
References: | Adjemian, S., Bastani, H., Karamé, F., Juillard, M., Maih, J., Mihoubi, F., Perendia, G., Pfeifer, J., Ratto, M., Villemot, S., 2011. Dynare: Reference Manual Version 4. Dynare Working Papers 1, CEPREMAP. Adolfson, M., Laseen, S., Linde, J., Villani, M., 2007. Bayesian estimation of an open economy DSGE model with incomplete pass-through. Journal of International Economics 72 (2), 481-511. An, S., Schorfheide, F., 2007. Bayesian analysis of DSGE models. Econometric Reviews 26 (2-4), 113-172. Andrés, J., López-Salido, J. D., Nelson, E., 2009. Money and the natural rate of interest: structural estimates for the United States and the Euro area. Journal of Economic Dynamics and Control 33 (3), 758-776. Andrés, J., López-Salido, J. D., Vallés, J., 2006. Money in an estimated business cycle model of the Euro area. Economic Journal 116 (511), 457-477. Argov, E., 2012. The choice of a foreign price measure in a Bayesian estimated New Keynesian model for Israel. Economic Modelling 29 (2), 408-420. Argov, E., Barnea, A., Binyamini, A., Borenstein, E., Elkayam, D., Rozen shtrom, I., 2012. MOISE: a DSGE model for the Israeli economy. Discussion Paper 2012.06, Bank of Israel. Argov, E., Elkayam, D., 2010. An estimated New Keynesian model for Israel. Israel Economic Review 7 (2), 1-40. Aruoba, S. B., Diebold, F. X., Scotti, C., 2009. Real-time measurement of business conditions. Journal of Business & Economic Statistics 27 (4), 417-427. Bank of Israel, 2003. Recent Economic Developments. Research Department 101, Bank of Israel. Bank of Israel, 2009. Recent Economic Developments. Research Department 124, Bank of Israel. Barnett, W. A., 1980. Economic monetary aggregates an application of index number and aggregation theory. Journal of Econometrics 14 (1), 11-48. Barthélemy, J., Clerc, L., Marx, M., 2011. A two-pillar DSGE monetary policy model for the euro area. Economic Modelling 28 (3), 1303-1316. Belongia, M. T., Ireland, P. N., 2014. The Barnett critique after three decades: a New Keynesian analysis. Journal of Econometrics 183 (1), 5-21. Benchimol, J., 2011. New Keynesian DSGE models, money and risk aversion. PhD dissertation, Université Paris 1 Panthéon-Sorbonne. Benchimol, J., 2014. Risk aversion in the Eurozone. Research in Economics 68 (1), 39-56. Benchimol, J., 2015. Money in the production function: a New Keynesian DSGE perspective. Southern Economic Journal 82 (1), 152-184. Benchimol, J., Fourçans, A., 2012. Money and risk in a DSGE framework: a Bayesian application to the Eurozone. Journal of Macroeconomics 34 (1), 95-111. Benchimol, J., Fourçans, A., 2016. Money and monetary policy in the Euro zone: an empirical analysis during crises. Forthcoming in Macroeconomic Dynamics. Bernanke, B., 2009. The crisis and the policy response. A speech at the Stamp Lecture, London School of Economics, London, England, January 13. Binyamini, A., 2007. Small open economy New Keynesian Phillips curve: derivation and application to Israel. Israel Economic Review 5 (1), 67-92. Brave, S., Butters, R. A., 2012. Diagnosing the financial system: financial conditions and financial stress. International Journal of Central Banking 8 (2), 191-239. Calvo, G., 1983. Staggered prices in a utility-maximizing framework. Journal of Monetary Economics 12 (3), 383-398. Canova, F., Sala, L., 2009. Back to square one: Identification issues in DSGE models. Journal of Monetary Economics 56 (4), 431-449. Caraiani, P., 2015. The role of money in DSGE models: a forecasting perspective. Forthcoming in Journal of Macroeconomics. Castelnuovo, E., 2012. Estimating the evolution of money's role in the U.S. monetary business cycle. Journal of Money, Credit and Banking 44 (1), 23-52. Chari, V. V., Kehoe, P. J., McGrattan, E. R., 2009. New Keynesian models: not yet useful for policy analysis. American Economic Journal: Macroeconomics 1 (1), 242-66. Christiano, L., Trabandt, M., Walentin, K., 2010. DSGE models for monetary policy analysis. Working Papers 16074, National Bureau of Economic Research. Christo¤el, K., Coenen, G., Warne, A., 2008. The new area-wide model of the euro area - a micro-founded open-economy model for forecasting and policy analysis. Working Paper Series 944, European Central Bank. Corsetti, G., Dedola, L., Leduc, S., 2008. High exchange-rate volatility and low pass-through. Journal of Monetary Economics 55 (6), 1113-1128. Edge, R. M., Gürkaynak, R. S., 2010. How useful are estimated DSGE model forecasts for central bankers? Brookings Papers on Economic Activity 41 (2), 209-259. Eggertsson, G. B., Woodford, M., 2003. The zero bound on interest rates and optimal monetary policy. Brookings Papers on Economic Activity 34 (1), 139-235. El-Shagi, M., Giesen, S., 2013. Money and inflation: consequences of the recent monetary policy. Journal of Policy Modeling 35 (4), 520-537. Fernández-Villaverde, J., Rubio-Ramírez, J. F., 2004. Comparing dynamic equilibrium models to data: a Bayesian approach. Journal of Econometrics 123 (1), 153-187. Fourçans, Andréand Vranceanu, R., 2007. The ECB monetary policy: choices and challenges. Journal of Policy Modeling 29 (2), 181-194. Galí, J., 2008. Monetary policy, inflation and the business cycle: an introduction to the New Keynesian framework. Princeton, NJ: Princeton University Press. Geweke, J., Keane, M., Runkle, D., 1997. Statistical inference in the multinomial multiperiod probit model. Journal of Econometrics 80 (1), 125-165. Holden, C., Subrahmanyam, A., 1996. Risk aversion, liquidity, and endogenous short horizons. Review of Financial Studies 9 (2), 691-722. Ireland, P., 2004. Money's role in the monetary business cycle. Journal of Money, Credit and Banking 36 (6), 969-983. Iskrev, N., 2010. Local identification in DSGE models. Journal of Monetary Economics 57 (2), 189-202. Jacquier, E., Polson, N., Rossi, P., 2002. Bayesian analysis of stochastic volatility models. Journal of Business and Economic Statistics 20 (1), 69-87. Kolasa, M., 2015. How frequently should we reestimate DSGE models ? International Journal of Central Banking 11 (4), 279-305. Michelson, N., Suhoy, T., 2014. Weekly monitoring of financial systems in transition: a financial conditions index and a credit conditions index - the Israeli case. Proceedings, World Finance Conference. Moccero, D. N., Pariès, M. D., Maurin, L., 2014. Financial conditions index and identification of credit supply shocks for the Euro area. International Finance 17 (3), 297-321. Poilly, C., 2010. Does money matter for the identification of monetary policy shocks: a DSGE perspective. Journal of Economic Dynamics and Control 34 (10), 2159-2178. Smets, F., Wouters, R., 2003. An estimated dynamic stochastic general equi librium model of the Euro area. Journal of the European Economic Association 1 (5), 1123-1175. Smets, F., Wouters, R., 2007. Shocks and frictions in US business cycles: a Bayesian DSGE approach. American Economic Review 97 (3), 586-606. Székely, G. J., Rizzo, M. L., Bakirov, N. K., 2007. Measuring and testing dependence by correlation of distances. Annals of Statistics 35 (6), 2769-2794. Tovar, C. E., 2008. DSGE models and central banks. BIS Working Papers 258, Bank for International Settlements. Woodford, M., 2003. Interest and prices: foundations of a theory of monetary policy. Princeton, NJ: Princeton University Press. |
URI: | https://mpra.ub.uni-muenchen.de/id/eprint/69587 |