A New Phillips Curve for Israel Theory and Some Evidence
The paper offers an alternative description of a Phillips curve for the Israeli economy in the last decade. We use a structural model, based on the micro-founded "New Keynesian" relationship between marginal costs and inflation along the lines of the approach presented in Gali and Gertler (1999) and Sbordone (2001) and following the extension for an open economy by Balakrishnan and Lopez-Salido (2002). The estimation results show that the frequency of price adjustments in Israel was relatively high---updating prices every 2 to 3 quarters on average, but in the magnitude of the results for other countries. We also found that the share of price adjustments which is based on backward looking considerations is, on the background of Israel's inflationary history, low - only about 0.2 to 0.5 of price updates.