Propogation of Shocks in a High-Inflation Economy: Israel, 1980-85

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The purpose of this paper is to provide empirical answers to questions related to the propagation of shocks in a high-inflation economy. Do one-time inflationary shocks give rise to long-term persistence, or inertia? Do balance of payments' shocks trigger a process that, through indexation and monetary accommodation, results in long-term changes in inflation? Within the context of a specific hypothesis, influential both in policy discussions and in economic analyses, the paper addresses these issues using Israeli data and vector-autoregression techniques. The evidence does not support the hypothesis that one-time nominal shocks have a persistent effect on the inflation rate, or the hypothesis that long-term changes in inflation are triggered by autonomous fluctuations in the trade balance.

Published: "Foreign Trade Shocks and the Dynamics of High Inflation: Israel, 1978-85" Journal of International Money and Finance, Vol. 7, pp. 411-423, (1988).

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