The Israeli Structural Model

Summary

This paper introduces the Israeli Structural Model (ISM), a New-Keynesian Dynamic Stochastic General Equilibrium (DSGE) model tailored to reflect key characteristics of the Israeli economy. The ISM incorporates diverse consumer saving behaviors and labor skills, a dynamic high-tech (HT) sector, international trade and capital integration, and comprehensive fiscal components. As an integral part of the Ministry of Finance's (MOF) Forecasting and Policy Analysis System (FPAS), the ISM serves as a macroeconomic policy scenario analysis tool, aiding in policy discussions and decision-making. This paper illustrates the ISM's policy use by evaluating strategies for utilizing additional government revenue generated from the HT sector boom in 2022 and their macroeconomic impacts. It compares three policy options: accelerated public debt reduction, redistribution through transfers, and increased public investment. The findings indicate that increased public investment is the most beneficial strategy, in the aftermath of the COVID-19 pandemic, accelerating GDP's convergence to its trend, reducing public debt to GDP ratios, and mitigating real appreciation and the impact on the most vulnerable population.