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1
The New Bank of IsraelConference Honoring Stanley Fischer
Jerusalem, June 18, 2013
Inflation Targeting, Disinflation, & Exchange-Rate Policies
Jacob A. FrenkelChairman, JP Morgan International
Former Governor, Bank of Israel
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2
133
102
132
191
445
185
20 16 17 21 18 18 9 11 15 8 11 7 9 1.3 0 1.40
50
100
150
200
250
300
350
400
450
Per
cen
t
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
Date: January 2002 Note: data for 2001 refers to November 2001
The Rate of Inflation
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3
-0.3
2.1
1.3
3.6
4.5
5.95.6
3.6
1.0
1.9
1.3
-1
0
1
2
3
4
5
6
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Current Account Deficit as a Percent of GDP
Date: January 2002
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4
-4%
104%
$4 billion
62%
38%
$9 billion
-20
0
20
40
60
80
100
Per
cen
t o
f T
ota
l
1/1989-3/1995 3/1995-3/2000
Trade Transaction
Capital Transaction
* The sum above the columns indicates average cumulative change in transactions p.a. ** Including Unilateral transfers Date: November 2001
Foreign Exchange Transactions: Capital Versus Trade Flows*
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5
Shekel Exchange Rate vs Basket & USD (1)July 1985 - May 1989
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
2.1
III IV I II III IV II IV I II III IV I II
1985 1986 1987 1988 1989I III
Sh
eke
ls
Basket
US$
10%
Adjustment of8%v. basket
3%
3%
band
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6
NIS
Shekel Exchange Rate Basket (2) January 1989 - March 1992
1989 1990
1.80
1.90
2.00
2.10
2.20
2.30
2.40
I II III IV I II III IV
+ 3%- 3%
+ 3%-5%
+5%
10%
6%
Shift in band mid-point:
Shift in band mid-point:
6%
band
band
band
Shift in band mid-point:
- 3%
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7
Shekel Exchange Rate versus Basket (3) March 1990 - June 1992
NIS
1.80
1.90
2.00
2.10
2.20
2.30
2.40
2.50
2.60
2.70
II III IV I II III IV I II
1990 1991 1992
-5%
+5%
-5%
+5% -5%
+5%
10%
5%Shift in band mid-point:
Shift in band mid-point:
band
band
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8
Shekel Exchange Rate versus the Basket (4)Early 1992 - June 1994
Date: April 2001
2.4
2.6
2.8
3.0
3.2
3.4
3.6
+5%
-5%
6% slope
8% slope
Band with9%slope +5%
-5%
+5%
-5%
II III IV I II IVI
1992 1993
III I II III IV
1994
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9
Date: April 2001
2.9
3.4
3.9
4.4
4.9
5.4
+7%
-7%
6% slope
4% slope +5%
- 5 %
2% slope
Shekel Exchange Rate versus Basket (5)July 1994 - January 2001
6% slope
III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I
1995 1996 1997 1998 1999 2000
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10
Shekel Exchange Rate versus Basket (6)January 1997 - January 2002
Date: December 2001
Slope 6%
Slope 6%
Slope 6% Slope 4% Slope 2%
+7%
-7%
Slope 0%
44.0%
3.5
4.0
4.5
5.0
5.5
Jan-97
NIS
per
un
it o
f b
aske
t
Jan -01 Jan-02Jan-00Jan-99Jan - 98
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11
0%
5%
10%
15%
20%
25%
Exponential Trend
Moving Average
Trade in Options and Futures as a Share of Total Foreign Exchange Transactions
Date: 28 July 1999
(incl. TA stock exchange
Jul - 94 Jan - 95 Jan - 96Jul - 95 Jul - 96 Jul - 99Jan - 97 Jul - 97 Jan - 98 Jul - 98 Jan - 99
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12
10
8.6
3.5
1.62.5
4.3
0
2
4
6
8
10
Jun
-97
Oct
-97
Feb
-98
Jun
-98
Oct
-98
Feb
-99
Jun
-99
Oct
-99
Feb
-00
Jun
-00
Oct
-00
Feb
-01
Jun
-01
Oct
-01
Inflation Expectations Indicators:
Date: January 2002
Per
cen
t
Ave. Forecasters
Capital Markets
3.7
8.4
3.3
2.7
7.7
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1
0.4
-0.1
1.2
-0.3-0.4
0.3
-0.1-0.2
1.4
0.40.4
-0.2
0.5
1.41.3
0.1
-0.5
-0.8
-0.2
0.3
0.5
0.3
0.5
0.7
-0.2
-0.5
0.5
0.9
0.3
-0.6
0.6
0
-0.6
-0.1
0.9
0.40.40.3
0.1
-0.6
3
-0.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5J
ul-
97
Se
p-9
7
No
v-9
7
Ja
n-9
8
Ma
r-9
8
Ma
y-9
8
Ju
l-9
8
Se
p-9
8
No
v-9
8
Ja
n-9
9
Ma
r-9
9
Ma
y-9
9
Au
g-9
9
No
v-9
9
Feb
-00
Ma
y-0
0
Au
g-0
0
No
v-0
0
Feb
-01
Ma
y-0
1
Au
g-0
1
No
v-0
1
Change in the Monthly CPI
Date: November 2001
Ave. 7/97 to 8/98:0.3%
Ave. 12/98 to 11/01: 0.1%
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14
Change in the Annual CPI
Date: January 2002
18.1
10.8
7.8
1.30
1.4*
0
2
4
6
8
10
12
14
16
18
20
Pe
rce
nt
1986-1991 1992-1996
1997-1998
1999 2000 2001
* Note: data for 2001 refers to November 2001
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15
0
5
10
15
20
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Inflation Rate Upper Target Lower Target
Inflation Rate* and the Inflation Target
* Previous 12 months Date: December 2001
14.5
10.0
11.0
8.0
10.0
7.0
4.0
3.0
3.5
2.5
3.0
2.01.0
3.04.0
10.0
Per
cen
t
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16
The Bank of Israel Monthly Interest Rate and Inflation Expectations
Date: December 2001
Per
cen
t
Bank of Israel Interest Rate
Inflation Expectations
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17
In Nominal and Expected Real TermsBank of Israel Interest Rate
Date: December 2001
2.5
6.0
2.21.3
7.06.0
8.5
2.9
9.3
13.513.4
17.0
6.3
14.0
9.5
3.8
0
2
4
6
8
10
12
14
16
18
1996 1997 1998 1999 2000 2001 2002
BoI Nominal Interest Rate
Expected Real Interest Rate
Expected real interest rate = Effective Bank of Israel interest rate adjusted for inflation expectations
Per
cen
t
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18
108.5
130.1 129.7
105.7
112.1109.7
108.0105.2
107.1
129.2127.8
122.0
100
105
110
115
120
125
130
135
1997 1998 1999 2000 2001 2002
NIS Depreciation & CPI Differential with US
Date: November 2001
Inflation Differential
Depreciation
Cumulative since January 1997
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Israel’s International Credit Ratings
Date: November 2001
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8M
ar-8
0
Mar
-83
Mar
-86
Mar
-89
Mar
-92
Mar
-95
Mar
-98
Mar
-01
BBB-BBB
BBB+A-
A3A2
S&P
Moody’s
Institutional Investor
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20
0.7
0.8
0.9
1
1.1
1.2
1.3
1.4
1.5
1.6
1 6 11 16 21
Inflation
Isra
el's
rat
ing
/sa
mp
le a
ve
rag
e
1989
1995
1986
19961994
1992
1993
1987
19881991
1990
1997 19981999
Source: Institutional Investor, semi-annual surveyIncrease = improvement relative to sample (about 100 countries)
International Credit Rating and Inflation1986 to 1999
Date: January 2000
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2.1
4.3
6.4
1.0
2.7
3.7
4.5
2.6
7.1
3.8
2.7
6.5
2.5
2.5
5.0
0.8
2.5
3.3
0.0
2.4
2.4
-0.1
2.4
2.3
2.6
2.4
6.0
-1
0
1
2
3
4
5
6
7
8
Per
cent
1990-1992 1993 1994 1995 1996 1997 1998 1999 2000
GDP per Capita Population
Growth Rate of GDP
Date: April 2001
