Disinflation and the Phillips Curve: Israel 1986-2015

Rafi Melnick and Till Strohsal

No 2016-039, SFB 649 Discussion Papers from Humboldt University Berlin, Collaborative Research Center 649: Economic Risk

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: C22 E31 E52 E58 (search for similar items in EconPapers)
Date: 2016
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