Abstract:

This paper analyzes the growth episodes in Israel for the period 1961-2006. In addition to traditional variables that affect growth we build an index for Macroeconomic Policy Quality, based on the pricipal component analysis of Sirimanetham and Temple (2005). We find that Macroeconomic Policy Quality influences significantly growth episodes in Israel. However, we find that exogenous factors like changes in world trade and security events have a higher impact on growth episodes that policy variables. We also found that supply variables like immigration to Israel are not enough to explein growth: we need adding demand variables to explain them. We found that two thirds of the transition from the recession of 2001-2003 to growth afterwards were explained by exogenous factors, and only one third was explained by policy variables - quality of macroeconomic policy and statutory tax reductions.