05.09.2010
 
New research in the Bank of Israel:
Did the Bank of Israel Affect the Exchange Rate?
 
 
  The start of the Bank of Israel's purchases of foreign currency in March 2008, their increase in July 2008, and the transition from fixed to ad hoc purchases of foreign currency in August 2009 led to depreciation of the shekel.
  The strongest estimated effect was recorded in the period after July 2008 when the scale of the purchases was increased, and the deviation of the actual exchange rate from its forecast level exceeded 10 percent.
  At the end of 2008 the effect of Bank of Israel activity on the exchange range started to weaken, and in the first half of 2009 the gap between the actual exchange rate and its expected level without Bank of Israel intervention closed.
A study by Avihay Sorezcky of the Bank of Israel Research Department examined the effect on the NIS/US$ nominal exchange rate of Bank of Israel intervention in the foreign currency market. The effect of the purchases was measured by comparing the forecasts of the exchange rate derived from an econometric model with the actual exchange rate in the intervention period. Before performing the comparison the quality of the model's forecasts was examined, and it was found that it produced good forecasts (given the actual values of the model's exogenous variables). It was found that the changes in the Bank of Israel's policy of intervention in the foreign currency market in March 2008, July 2008 and August 2009 resulted in shekel deprecation. The strongest estimated effect was that in August 2008, following the increase in the scale of the Bank's foreign currency purchases. It was also found that the effect started to wane at the end of 2008, and that in the first half of 2009 the gap between the actual exchange rate and its expected level in the absence of Bank of Israel intervention closed, until it widened again when the Bank changed its intervention policy from one of fixed daily purchases to ad hoc purchases.
 
 
a The effect of the intervention on the exchange rate was estimated as the deviation of the exchange rate forecast by the BVAR model from the actual exchange rate in the intervention period.
 
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