DP290 | The Fiscal and Monetary Dynamics of Israeli Inflation: A Cointegrated Analysis 1970-1987

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Using quarterly data from 1970-1987 we estimate a simple econometric model in which inflation and the money supply are jointly determined and in which expectations of inflation are rational, or forward-looking. The model is estimated using the recently developed `cointegration' principle in econometrics. The main findings are that Israeli inflation reflected monetary growth which in turn reflected the fiscal deficit, and that the authorities have systematically accommodated inflationary shocks in the execution of monetary policy.