Inflation Targeting Model in Israel Predicts Currency Devaluation and Interest Rates
The Bank of Israel implemented an inflation targeting regime in 1992. A model was created to understand how inflation, currency devaluation, and interest rates are determined under this regime. The model uses data from 1992 to 2000 and factors in inflation expectations, interest rate gaps, and currency differentials. The findings show that monetary policy influences inflation and currency devaluation, and the model can be used for forecasting and policy analysis.