Persistent Growth Episodes and Macroeconomic Policy Performance in Israel

Abstract

This paper presents an analysis of growth episodes in Israel during the years 1961-2006. The analysis uses, in addition to the standard variables, an index of the quality of macroeconomic management along the lines presented by Sirimaneetham and Temple (2005). The quality of macroeconomic management turns out to have a significant impact on growth episodes. However, our quantitative analysis shows that exogenous variables like world trade and security events had a larger impact on growth episodes than did the policy variables. We also found that forces that enhance supply, like the labor market experience of immigrants, are insufficient to explain persistent growth episodes in Israel; demand variables are also needed in order to explain these episodes. Using our analytical framework, we quantify the contributions of the different forces to the transition from the 2001-2003 recession to the present growth episode; we found that two-thirds of this transition is explained by exogenous variables––mainly the world trade and the security situation––and one-third is explained by policy variables, i.e., better macroeconomic performance and the reduction of tax rates.