Disinflation in Steps and the Phillips Curve: Israel 1986-2015

44 Pages Posted: 4 Aug 2016 Last revised: 18 Jul 2017

See all articles by Rafi Melnick

Rafi Melnick

Interdisciplinary Center Herzliya

Till Strohsal

Free University of Berlin (FUB) - Division of Economics

Date Written: June 27, 2017

Abstract

A Phillips Curve (PC) framework is utilized to study the challenging post-1985 disinflation process in Israel. The estimated PC is stable and has forecasting power. Based on endogenous structural break tests we find that actual and expected inflation are co-breaking. We argue that the step-like development of inflation is in line with shocks and monetary policy that changed inflationary expectations. The disinflation process was long, and a long-term commitment by both the Central Bank and the government was required. Credibility was achieved gradually and the transition from the last step of 10% to 2% inflation was accomplished by introducing an inflation targeting regime.

Keywords: Phillips Curve, Expected Inflation, Opportunistic Disinflation, Multiple Breakpoint Tests, Inflation Targeting

JEL Classification: E31, E52, E58, C22

Suggested Citation

Melnick, Rafi and Strohsal, Till, Disinflation in Steps and the Phillips Curve: Israel 1986-2015 (June 27, 2017). Available at SSRN: https://ssrn.com/abstract=2817360 or http://dx.doi.org/10.2139/ssrn.2817360

Rafi Melnick (Contact Author)

Interdisciplinary Center Herzliya ( email )

P.O. Box 167
Herzliya, 46150
Israel

Till Strohsal

Free University of Berlin (FUB) - Division of Economics ( email )

Boltzmannstr. 20
Berlin 14195, 14195
Germany

HOME PAGE: http://www.wiwiss.fu-berlin.de/fachbereich/vwl/nautz/mitarbeiter/Strohsal/index.html

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