Alex Cukierman, Thomas Lustenberger, 04 November 2018

Almost 60 years ago, John Muth introduced the idea that adaptive expectations are rational if they efficiently use all available information. However, individuals are never fully certain, even ex post, about the permanence of economic developments. Using Israeli data, this explores the implications of this residual uncertainty for market efficiency. The findings point to issues with conventional market efficiency tests where ‘permanent-transitory confusion’ is in effect. 

Alex Cukierman, 02 November 2018

The size and nature of an economy have a crucial influence on the measures that can be taken in response to major shocks. This column investigates the forex interventions taken by Switzerland and Israel – two small, open economies – in the wake of the Global Crisis. While discretionary interventions are shown to be preferable when policy rates are strictly positive, this is no longer valid when the effective lower bound is reached and unconventional monetary policy is called for. The transfer of reserve management to a sovereign wealth fund is also discussed. 

Yossi Saadon, Nathan Sussman, 31 October 2018

Global integration has increased rapidly over recent decades, leaving basic theories of exchange rate equilibrium ripe for reconsideration. This column tests two such theories – purchasing power parity and uncovered interest rate parity – using the case of the advanced, small open economy of Israel and the US. The results show that when the necessary conditions are met, the purchasing power parity and uncovered interest rate parity relationships continue to hold in the short run. 

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