challenges faced by advanced inflation targeters · 2018. 7. 30. · challenges faced by advanced...
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Challenges faced by Advanced Inflation Targeters:
The Case of Israel
Karnit FlugBank of Israel
Prepared for a Conference at the Czech National Bank,April 8 2008
Economic Performance of the Israeli Economy
GDP and Business-Sector Product)*1995-2008 (
6.6
5.4
2.8
4.2
2.9
8.9
-0.4 -0.6
2.3
5.2 5.3 5.2 5.3
3.2
8.5
6.6
3.0
4.9
2.8
11.3
-1.7-2.5
3.2
7.26.5 6.5 6.1
3.6
-5
-3
-1
1
3
5
7
9
11
13
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008F
GDP Business-sector product
•SOURCE: Central Bureau of Statistics.* BOI Forecast.
%
1.6
2.93.0
3.83.2
2.9 2.83.1
3.6
1.8
3.9
3.0
4.0
3.4
0.0
0.9
4.24.0
3.2 3.1 3.2
0.7
4.4
3.8
5.4
3.6
1.9
0
1
2
3
4
5
6
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005* 2006 2007 2008
Deficit Target Actual Deficit
Budget Deficit**(percentage of GDP, 1995-2007)
*Percent of GDP; excluding credit extended. Until 1996, domestic deficit; from 1997, total deficit.*The data from 2000 refer to the deficit excluding the Bank of Israel’s profits.
Public Sector Debt,Percentage of GDP, 1995-2007 (year-end)
104.5 102.6 101.8 103.397.5
87.191.9
99.8 101.7 99.995.7
86.680.6
0
20
40
60
80
100
120
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
%
Rate of Unemployment1995-2007 (Annual)
%
SOURCE: Based on Central Bureau of Statistics Labour Force Survey.
6.8 6.6
7.6
8.69.0 8.8
9.3
10.310.7 10.4
9.08.4
7.3
0
3
6
9
12
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
-5.1 -5.0
-3.1
-0.9-1.4
-0.8 -1.1 -0.8
1.2
2.43.3 3.1
6.0
-6
-4
-2
0
2
4
6
819
95
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Current Account of Balance of Paymentsas Percentage of GDP, 1995-2007 (Annual)
•SOURCE: Balance of Payments, Central Bureau of Statistics.
Investment in Israel by Nonresidents(as percentage of GDP, 2000-2007)
Investment of Israeli Residents Abroad(as percentage of GDP, 2000-2007)
02468
101214161820
2000 2001 2002 2003 2004 2005 2006 2007
Direct investment Portfolio investment
0235689
1112141517
2000 2001 2002 2003 2004 2005 2006 2007
Direct investment Portfolio investment
SOURCE: Central Bureau of Statistics, Balance of Payments.
%
%
8,798
14,694
4,868
4,2177,251
2,0123,822
1,812
1,767
7233,626
755,062
5,058
9,790
14,9928,244
2,9414,548
2,381
2,0653,1542,708
9821,623
688
2,1493,336
270
10,276
6,649
7,064
Monetary Policy Regime
NIS/Currency-Basket Exchange RateNIS
0
1
2
3
4
5
6
7
8
08/8
6
08/8
7
08/8
8
08/8
9
08/9
0
08/9
1
08/9
2
08/9
3
08/9
4
08/9
5
08/9
6
08/9
7
08/9
8
08/9
9
08/0
0
08/0
1
08/0
2
08/0
3
08/0
4
08/0
5
08/0
6
08/0
7
Declaration of IT
Full-fledge ITAdoption
of IT
Inflation and Inflation Targets
1-32006
1-320041-32005
1-32007
Inflation Targets
1-320032-32002
2.5 - 3.520013-4200041999
7-1019987-1019978-1019968-111995
81994101993
14-151992
0
1
2
3
4
5
6
7
Austra
liaIce
land
United
Kingdo
mIsr
ael
Norway
New Zea
land
Spain
Finland
Korea
Canad
aSwed
enTha
iland
Columbia
Czech
Rep
ublic
Chille
PeruPhil
ippines
Poland
Mexico
Hungary
South A
frica
Brazil
Target Center
Developing Countries Developed Countries
Inflation Targets in the WorldA
nnua
l Inf
latio
n Ta
rget
Monetary Policy
Rate of Inflation in Last 12 Months, Inflation Rate of Inflation in Last 12 Months, Inflation Expectations* and Inflation Targets, Expectations* and Inflation Targets, 19941994--20082008
-3
-1
1
3
5
7
9
11
13
15
17
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Inflation during previous 12 months
Inflation target
%
-3
-1
1
3
5
7
9
11
13
15
17
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
*For 12 months, as derived from the capital market.
Inflation Expectations
-5
0
5
10
15
20
01/9
406
/94
11/9
404
/95
09/9
502
/96
07/9
612
/96
05/9
710
/97
03/9
808
/98
01/9
906
/99
11/9
904
/00
09/0
002
/01
07/0
112
/01
05/0
210
/02
03/0
308
/03
01/0
406
/04
11/0
404
/05
09/0
502
/06
07/0
612
/06
05/0
710
/07
03/0
8
Bank of Israel interest rate
Actual Inflation
%
Bank of Israel Interest Rate, and Actual Bank of Israel Interest Rate, and Actual Inflation*, Inflation*, 19941994--20082008
*In last 12 months.
Bank of Israel Interest Rate, Inflation Bank of Israel Interest Rate, Inflation Expectations*, and the FedExpectations*, and the Fed’’s interest Rate, s interest Rate,
19941994--20082008
0
2
4
6
8
10
12
14
16
18
01/9
406
/94
11/9
404
/95
09/9
502
/96
07/9
612
/96
05/9
710
/97
03/9
808
/98
01/9
906
/99
11/9
904
/00
09/0
002
/01
07/0
112
/01
05/0
210
/02
03/0
308
/03
01/0
406
/04
11/0
404
/05
09/0
502
/06
07/0
612
/06
05/0
710
/07
03/0
8
Bank of Israel interest rate
Fed's interest rate
%
*For 12 months, as derived from the capital market.
Challenges
-5-4-3-2-101234567 Deviations from above Deviations from below
Rate of Inflation in Last 12 Months Inflation Targets
2003 2004 2005 2006
%
Rate of Inflation in Last 12 Months, Rate of Inflation in Last 12 Months, Inflation Targets and Deviations from Inflation Targets,Inflation Targets and Deviations from Inflation Targets,
20032003--20082008
2007
2008
Price Index and Shekel/Dollar Exchange Rate )Rate of change over 12 months, up to February 2008(
-4
-2
0
2
4
6
8
10
12
01/97
07/97
01/98
07/98
01/99
07/99
01/00
07/00
01/01
07/01
01/02
07/02
01/03
07/03
01/04
07/04
01/05
07/05
01/06
07/06
01/07
07/07
01/08
Percent
-16
-11
-6
-1
4
9
14
19Price index Exchange rate
Pass-Through from Exchange Rate to Prices:International Evidence and the Israeli Experience
Source: Choudhri and Hakura (2003) and bank of Israel estimetes
0.50.3Israel0.20.15Emerging Markets0.10.05Developed Economies
Over 1 YearOver 1 Quarter
In the second half of 2007 the Pass-Through has dropped sharply.
Volatility of the Exchange Rate in Israel and in Developed and Developing Countries
1997-2007
00.5
11.5
22.5
33.5
44.5
5
Singapore
Canada
Israe
lMex
icoUnite
d Kingdom
ChileUnite
d Stat
esNorw
aySwed
enPolandIce
land
Czech
Repub
licSouth A
frica
Korea
Developing CountriesDeveloped Countries
a SD of monthly depreciation against the US$. For US - US$ against synthetic €.
Volatility of Inflation in Israel and in Developed and Developing Countries
1997-2007
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
USACanad
a UK
ChilleSwed
enSingap
urNorw
aySouth A
frica
Korea
Mexico
Israe
lPolandIce
land
Czech
Repub
lic
Developing CountriesDeveloped Countries
Commodities and Oil Prices)06 /2001-03/2008 ,100=06/2001 (
0
50
100
150
200
250
300
350
400
Jun-01
Dec-01
Jun-02
Dec-02
Jun-03
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
$
Oil PricesCommoditiesNon Energy Commodities
Index of Real Exchange Rate by Trading Partners )01 /1997-03/2007 (%
•A rise in the index indicates depreciation.
•The figure for March 2008 is calculated from spot exchange rates known for the half-month, our forecast CPI from the monthly model, and an extrapolation of inflation in the countries whose currencies are in the currency basket.
•SOURCE: IFS data. For November 2007 to March 2008, Bank of Israel calculations.
90
95
100
105
110
115
120
125
130
135
01/97
07/97
01/98
07/98
01/99
07/99
01/00
07/00
01/01
07/01
01/02
07/02
01/03
07/03
01/04
07/04
01/05
07/05
01/06
07/06
01/07
07/07
01/08
115.6
Most Recent Developments:• A two day intervention (during 13-14/03/08) in FX
market where the Bank of Israel purchased FX due to disorderly sharp appreciation of the NIS.
• An announcement of the intention to purchase FX at an amount of some 25 million US$ per day over the next 2 years aimed at raising FX reserves to a more adequate level of 35-40 billion US$.
• Two consequtive reductions of interest rates for March and April by 0.5% each
March 13-14, 2008
Shekel/Dollar
Shekel/Euro
-2.62%
-2.52%
The Change in Foreign Exchange Reserves($,1998 - 2007)
Source: IMF
-100%-50%
0%50%
100%150%200%250%300%350%400%450%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
World Reserves OECD Non OECD Israel Eurozone OECD ex Eurozone
Final Comment• During the Inflation Targeting Regime we
had high volatility of inflation and frequent episodes where inflation was outside the target range.
• However, expectations for inflation were always, in recent years, within the inflation target range.
• Thus, by anchoring expectations within the price stability range, inflation targeting has provided a stable environment to economic agents .
Thank You