BoI: Policymakers have less impact on growth

The research, which centered on growth episodes and not on long-term growth, showed that there had been an improvement in macroeconomic management, particularly in the past four years, characterized by a drop in inflation and in the general government budget deficit.

By SHARON WROBEL
July 5, 2007 07:22
1 minute read.

 
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Israel's transition from the years of recession to the present continued growth period of four years is mainly attributable to factors on which policymakers have no direct impact, such as world trade and the security situation and to a lesser extent by the improvement in macroeconomic management, according to a research paper published by the Bank of Israel on Wednesday. "World trade and the security situation are responsible for approximately two-thirds of this transition, and policy variables - micromanagement improvement and tax reduction - are responsible for approximately one-third," concluded Drs. Karnit Flug and Michel Strawczynski of the Bank of Israel's Research Department in a discussion paper. The research, which centered on growth episodes and not on long-term growth, showed that there had been an improvement in macroeconomic management, particularly in the past four years, characterized by a drop in inflation and in the general government budget deficit, which had a significant impact on growth. At the same time, however, quantitative analysis revealed that exogenous variables like world trade - world demand for Israeli exports - the security situation and the waves of immigration to Israel, had a larger impact on growth episodes than did the policy variables. The research paper suggests that in the case of Israel, although high-quality macroeconomic policy was necessary, it was not a sufficient condition for sustained economic growth. In addition, the Bank of Israel paper, which presented an analysis of growth episodes in Israel during the years 1961- 2006, found that the labor market experience of immigrants were insufficient to explain persistent growth episodes such as the current growth episode, which has continued for four years.

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