ndustry Effects of Monetary Policy in Israel - A Var Analysis

This study uses cross-sectional data for the years 1997-2006 to examine the effects of monetary policy on different manufacturing industries. The effects of interest-rate shocks and exchange-rate shocks on the amount produced and the price (to the consumer) in each of 16 industries was studied by means of a system of VAR equations that incorporated five endogenous variables-the Bank of Israel interest rate, the shekel/dollar exchange rate, labor costs per hour, price, and quantity produced. It was found that a rise in the interest rate was generally reflected in a reduction in the amount produced, in conjunction with a fall in price that expressed the effect of demand. An exchange-rate shock was reflected by a price rise in nearly all industries, usually with a cumulative decline in the amount produced. The second part of the study examines the connection between the characteristics of the different industries and their responses to interest-rate and exchange-rate shocks. It was found that the effect on demand of an interest-rate shock was greater in industries that produce consumer durables. It was also found that a price rise in response to an interest-rate increase was smaller in high-tech industries and industries in which production is concentrated in a few companies. In the concentrated industries, a temporary increase in the exchange rate is reflected to a larger extent in a rise in prices. On the other hand, the data indicate that the relative performance over time of the non-bank funds has been poor and no better than bank fund performance. The published data on non-bank performance tends, however, to (mistakenly) show otherwise, in part because of survivor-bias problems - i.e. the surviving funds perform better than the funds that close and for which returns are no longer reported. In sum, the performance data as well as the fact that these funds are required to pay the banks additional marketing fees as well as costly regulatory requirements in Israel raise doubts as to whether the non-bank funds will be able to provide satisfactory returns over time