MEASURING THE EFFECT OF FORWARD GUIDANCE IN SMALL OPEN ECONOMIES: THE CASE OF ISRAEL

Ari Kutai

Israel Economic Review, 2023, vol. 21, issue 1, 75-142

Abstract: In this paper, I measure the effect of forward guidance in a small and open economy, using Israel as a case study. I suggest an alternative approach to the standard method of Gurkaynak et al. (2005) that relaxes the assumption of constant structure and estimates the effect of forward guidance (FG) separately for each shock and term to maturity. Namely, I relax the assumption that the relative effect is fixed across maturities for every FG shock, regardless of the information contained in each FG statement. This approach also controls for global shocks under the assessment that their impact may not be negligible in a small open economy. I find that while the estimates of the shocks from both methods are highly correlated, the standard method leads to imprecise identifications in cases where the FG shocks mainly affect specific terms to maturity. The results suggest that policymakers should take into consideration which term to maturity each FG statement impacts. In addition, I show that some of the main FG statements made by the Bank of Israel significantly affected yields.

Keywords: Monetary Policy; Forward Guidance; Small Open Economies (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 E58 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Measuring the Effect of Forward Guidance in Small Open Economies: The Case of Israel (2020)
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