A Monthly Model for Evaluation of Inflation and Monetary Policy in Israel

11/12/2006 |  Ilek Alex
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Monetary Policy and Inflation
A Monthly Model for Evaluation of Inflation and Monetary Policy in Israel
Alex Ilek
Abstract
This paper presents a monthly structural model for evaluation of inflation and monetary policy in Israel. This model includes some structural equations based on New-Keynesian theory, however the main emphasis is on the empirical side. The CPI inflation process in this model is constructed by three components modeled separately: the equation for housing - behavior of this component is unique, because measured housing prices are linked almost completely to the exchange rate of shekel against dollar; the equation for apparel and footwear - this component characterized by large fluctuations because of seasonal factors; and the rest of the components of the CPI.
The model presented below may be useful for two purposes: first - forecasting of inflation and other related variables, mainly in the short run; second - derivation of the key policy interest rate consistent with achieving the inflation target.
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