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Disinflation in steps and the Phillips curve: Israel 1986–2015

Rafi Melnick and Till Strohsal

Journal of Macroeconomics, 2017, vol. 53, issue C, 145-161

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 (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 C22 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:jmacro:v:53:y:2017:i:c:p:145-161