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New Bank of Israel Research: A Real Macroeconomic Model for the Israeli Economy
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An economic model recently developed by the Bank of Israel Research Department makes it possible to examine macroeconomic scenarios using quarterly data. The principal results from this research are as follows:
  An increase of NIS 1 in public spending increases GDP by NIS 0.40 (the fiscal multiplier). This relatively low multiplier is a result that stems from the openness of the economy and the substitution between imports and GDP, and the real appreciation caused by the increase in public consumption. The conclusion is that the effectiveness of using spending as an anti-cyclical fiscal policy is of limited effectiveness, and also generates a current account deficit.
  Increasing exports by NIS 1 increases GDP by NIS 0.90 (the export multiplier). This means that any change in exports has an almost identical effect on GDP. The conclusion is that the economy is very sensitive to shocks in world trade.
  In a regime that acts to stabilize or reduce the ratio of debt to GDP, announcing future income tax cuts in advance causes an immediate rise in aggregate demand and economic activity. When the tax cuts are implemented, however, they are accompanied by a budget cut that has a contractionary effect. Such a policy, reflected in a lower government share in GDP, has characterized fiscal policy in Israel from 2003 until the present time.
The new real macroeconomic model, now being applied for the first time, will help in the preparation of quarterly forecasts for the key macroeconomic variables – GDP, private consumption, exports, the real exchange rate, employment, and real wages – and will also be a useful tool in evaluating the effects of changes in fiscal policy on economic activity.
Dr. Amit Friedman (Bank of Israel Research Department) and Prof. Zvi Hercowitz (Tel Aviv University) developed the model.