Working Paper: NBER ID: w2003
Authors: Leonardo Leiderman; Assaf Razin
Abstract: The purpose of this paper is to provide empirical answers to questions related to the propagation of shocks in a high-inflation economy. Do one-time inflationary shocks give rise to long-term persistence, or inertia? Do balance of payments' shocks trigger a process that, through indexation and monetary accommodation, results in long-term changes in inflation? Within the context of a specific hypothesis, influential both in policy discussions and in economic analyses, the paper addresses these issues using Israeli data and vector-autoregression techniques. The evidence does not support the hypothesis that one-time nominal shocks have a persistent effect on the inflation rate, or the hypothesis that long-term changes in inflation are triggered by autonomous fluctuations in the trade balance.
Keywords: Inflation; Trade Deficit; Vector Autoregression; Israel
JEL Codes: E31; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade deficit fluctuations (F14) | exchange rate depreciation (F31) |
| trade deficit fluctuations (F14) | inflation (E31) |
| exchange rate depreciation (F31) | inflation (E31) |
| monetary shocks (E39) | nominal variables (C29) |