Money and monetary policy in Israel during the last decade

Abstract

This study examines how money and monetary policy have in‡uenced output and in ‡ation 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 and Fourçans, 2012). We test both models by using rolling window Bayesian estimations over the last decade (2001)(2002)(2003)(2004)(2005)(2006)(2007)(2008)(2009)(2010)(2011)(2012)(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 in ‡ation, 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 in ‡uence of money on output ‡uctuations 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.

Switching volatility in a nonlinear open economy

“…We therefore extend the literature by highlighting new transmission channels of money compared with other studies using linear closed-economy DSGE models with money Fourçans, 2012, 2017;Benchimol and Qureshi, 2020). Unlike this body of the literature, we show the role of money in the economy without assuming nonseparability between money and consumption (Benchimol, 2016), or a cash-in-advance constraint (Feenstra, 1986) or money in the production function (Benchimol, 2015). The money holdings from households and central banks needed to buy bonds involve such a role of money (Eq.…”

Time-varying money demand and real balance effects

“…A variation in may represent shocks to transactions technology -shocks that change the utility value of money relative to that of consumption expenditures (Koenig, 1990). Thus, …nancial innovation that reduces transaction costs may be captured by this 2 In non separable utility functions, the marginal utility of consumption directly depends on variations of real money balances and allows us to investigate the e¤ects of variations in real money on the economy (Benchimol, 2016). In contrast, a separable utility function leaves consumption, and the economy, indi¤erent to variations in real money balances (Benchimol, 2014).…”

Forecast performance in times of terrorism

“…It is well known that major terrorist attacks (Keefer and Loayza, 2008;Roberts, 2009), or continuous small and medium-sized terrorist attacks (Sandler and Enders, 2008;Benchimol, 2016), a¤ect the economy. The negative impact of terrorism on short-term activities mainly results from the reallocation of internal demand for public consumption (such as insurance, security forces, and investments) to the detriment of more productive investments, causing growth to decrease (Blomberg et al, 2004).…”