01.08.2010
 
New research in the Bank of Israel:
Recessions in Israel and Macroeconomic and Financial Crises––Their Duration and Severity
 
 
   In the years from 1991 to 2009 recessions in Israel had similar characteristics to those in the OECD countries, in which recessions associated with financial crises tend to be longer and more severe than other recessions.
  This is different from the situation in 1960–90, when recessions in Israel identified with financial crises were not longer than other recessions, nor was the loss of GDP different in the former than in the latter.
  The elasticity of Israel's GDP to financial crises increased markedly after 1990, whereas the elasticity to other shocks decreased.
  This latter finding is consistent with the broadening of the spread of financial assets evident in the last decades and the reduction in the government's share of business activity in the economy.
This study by Polina Dovman of the Bank of Israel Research Department investigates the characteristics of business cycles in Israel in the context of financial and macroeconomic shocks in the years 1960–2009. It was found that the loss of GDP in recessions[1] is significantly less than the increase in GDP in periods of growth: in recessions in Israel, GDP per capita dropped by 3.8 percent on average, while in times of growth it rose on average by 16.1 percent, and GDP itself increased by about 25 percent.
In the years from 1991 to 2009 recessions in Israel had similar characteristics to those in the advanced economies. In those years a recessions in Israel lasted on average five quarters, compared with four quarters in the advanced economies, and growth periods lasted fifteen quarters, compared with twenty-two quarters in the advanced economies. Previously, in 1960–90, recessions in Israel were far longer and more frequent than those in the advanced economies. In those years recessions and growth periods lasted for about ten quarters each on average. Thus, in 39 percent of the total period examined (1960–2009) Israel was in recession, while the advanced countries experienced recessions in only 10 percent of the time.
Until the 1990s, Israel's business cycles were more similar to those of the emerging market economies than to those of the advanced economies. Recessions in emerging markets are usually longer and are associated with frequent fluctuations in the growth trend. At the beginning of the 1990s Israel completed the transition process from being an emerging economy to an advanced one, a process that had started with the Stabilization Program of 1985. Since then recessions and periods of growth in Israel have more closely resembled those of the advanced economies than those of the emerging ones.
The characteristics of recessions in Israel related to macroeconomic shocks in the years from 1991 to 2009 are similar to those found in an IMF study of the OECD countries. In those years recessions identified with financial crises[2] were longer and more severe than other recessions, and the recovery process was slower than the recovery from other recessions. In contrast, in the years from 1960 to 1990 recessions related to financial crises were not different from other recessions. The loss of GDP per capita in financial-crisis-related recessions was actually lower than that in other recessions, their duration was not longer, neither were their recovery periods different. The explanation for the difference between the two periods lies in the limited involvement of the public in the capital market and the high degree of government involvement in business activity that were characteristic of Israel's economy prior to the Stabilization Program, which significantly limited the effect the public's welfare of shocks in financial markets on. Since the beginning of the1990s, however, the spread of asset among the public has increased, the capital market has become more sophisticated, and the government share of business activity has fallen. It should be noted that according to the findings in this study, in the current era too GDP per capita in Israel is more vulnerable to recessions abroad that affect demand for Israel's exports than it is to financial crises.
 
 
[1] A recession is defined as a period in which GDP per capita declines in two or more consecutive quarters.
[1] Financial crises are defined in terms of sharp increases in the risk level in the financial markets according to an index constructed as part of the study. [this study]
 
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