Monetary policy: Does Israel want to become Sweden?

According to the FT:

Sweden’s central bank has been lambasted by critics for trying to use interest rates to combat signs of a housing bubble. It lifted rates in 2010 and 2011 as it publicly worried about what it saw as high household debt levels.

In the case of Israel, it may not be coincidence that NGDP began a systematic deviation from trend when Ms Flug took over at the Bank of Israel. Maybe she prefers the role of Finance Minister:

Speaking at a Calcalist conference, Governor of the Bank of Israel said today, “Exceeding the 3% fiscal deficit target will expose the Israeli economy to significant risk and will be liable to harm us citizens. We must show responsibility and take into account the consequences of our decisions over time. Israel’s structural deficit, the deficit not subject to one-time shocks, is already one of the highest in the western world.”

As the charts show, Israel was one of a very small group of countries that managed to avoid the more crippling effects of the 2008-09 crisis. And it did that by managing to keep NGDP parading very close to trend.


israel sweden
















Sweden was “making-up” for its early mistake but then “bubble phobia” took over (leading to Lars Svensson´s resignation).

It would appear that until Ms Flug took over in July 2013, that Israel had an implicit NGDP level target rule. Up until then, Stanley Fischer was the BoI head honcho. But appearances can be misleading because shortly before stepping down Fischer said in a speech:

There are those who support setting a nominal GDP target. I think that this is very impractical. The data that we receive on nominal GDP are very unstable.  There are changes of whole percentage points between the various estimates of GDP. For this reason, I think that there is no reason to use nominal GDP as a target.

Maybe he thinks “output gaps” and “natural rates” are precisely estimated and known quantities!

By worrying about other stuff, like government spending and deficits, Ms Flug is signaling that the BoI will “neutralize” the move by contracting aggregate demand. And this is happening already!

When oil price jumped late in 2010 (after having dropped during the crisis), inflation went up and real growth down. But note (see charts below) that NGDP growth was sustained. Unfortunately, when real growth began to recover Ms Flug came on board and NGDP growth tanked, bringing down real growth and inflation, with the latter having now breached (0,8%) the lower limit of the 1% – 3% target band!




About the Author

Marcus Nunes
João Marcus Marinho Nunes is a partner of Phynance Estratégias Quantitativas e Investimentos and a professor of Economics at Fundação Getúlio Vargas in São Paulo, Brazil. He also blogs here:

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