The Effects on Industry 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 each of sixteen industries was studied by means of a series of VAR equations that incorporated five endogenous variables: the Bank of Israel interest rate, the NIS/$ 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, 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 quantity in some industries. The second part of the study analyses the connection between the characteristics of the different industries on the one hand, and their reactions to shocks on the other. It was found that the effect on quantities of an interest rate shock was stronger in industries that produce consumer durables. It was also found that price increase was smaller in high-tech industries and industries in which production is concentrated in a few companies.