Federal Reserve Bank of Kansas Citys economic symposium Prof. Amir - PowerPoint PPT Presentation

Federal Reserve Bank of Kansas City’s economic symposium Prof. Amir Yaron, Governor of the Bank of Israel 1

Israel trades primarily with the U.S and Europe Figure 1: Goods and Services Exports, 2017 Goods and Services Imports, 2017 Other EU Other EU 20% 30% 23% 40% Asia 22% Asia 26% USA USA 28% 12% 2 Source: CBS

Emerging market sovereign credit risk: Israel's sovereign credit risk is low, with exceptionally low variance compared to the other countries Figure 2: Five-year nominal spreads, CCS, and credit spreads (percentage points). Each figure plots 10-day moving averages of zero-coupon LC and FC spreads over the U.S. Treasury at five years. LC/US denotes the LC nominal yield over the five-year U.S. Treasury bond. FCCS denotes the FC credit spread. CCS denotes the fixed-for-fixed LC/dollar cross-currency swap rate. LCCS denotes the LC credit spread. 3 Source: Du, Wenxin, and Jesse Schreger. "Local currency sovereign risk." The Journal of Finance 71.3 (2016): 1027-1070.

The term structure of real rates: Israel between Europe and the U.S. Figure 3: % 1 0.58 1 0.29 0.21 0 -0.03 -1 -0.55 -0.70 -1 -1.21 -1.33 -1.33 -2 -1.82 -2 -1.85 -2.01 -2.01 -3 -2.46 -2.54 -3 3M 5Y 10Y UK Sweden Germany Israel US Source: Bloomberg and BoI. Updated to 15.07.19

100 105 110 115 120 125 95 Source: OECD and CBS Jan-2009 Apr-2009 median A ±25 % range from OECD Jul-2009 Oct-2009 OECD countries, yet subsequently the picture turned around During 2009-2013 Israel’s inflation rate was higher than in other Jan-2010 Apr-2010 Jul-2010 Oct-2010 Jan-2011 Apr-2011 Jul-2011 Oct-2011 Jan-2012 Apr-2012 Jul-2012 Oct-2012 CPI In Israel and the OECD, Jan-2013 Apr-2013 June 2019 = 100 OECD median Figure 4: Jul-2013 Oct-2013 Jan-2014 Apr-2014 Jul-2014 Oct-2014 Israel Jan-2015 Apr-2015 Jul-2015 Oct-2015 Jan-2016 Apr-2016 Jul-2016 Oct-2016 Jan-2017 Apr-2017 Jul-2017 Oct-2017 Jan-2018 Apr-2018 Jul-2018 Oct-2018 Jan-2019 Apr-2019 5

The sensitivity of stock returns to MNAs can increase by a factor greater than two coming out of recessions and remains above average for about one to two years Figure 5: 6 Source: Tzuo Law, Dongho Song, and Amir Yaron, 2016, “Fearing the Fed: How Wall Street Reads Main Street”, The Wharton School, working paper, revised 2019.

Larger debt to GDP ratio lowers liquidity spreads but tends to be associated with larger corporate spreads Figure 6: The figure plots the impulse response functions to a 1-standard deviation shock to debt-to-GDP ratio based on our estimated VAR. The VAR includes fed funds rate, real GDP growth, stock realized volatility, corporate bond excess return, debt-to-GDP ratio, corporate bond spread in Gilchrist and Zakrajsek (2012), the repo treasury bill rate spread, and the net increases of corporate bond. The sample period is from 1973Q1 to 2014Q12. 7 Source: Yang Liu, Lukas Schmid, and Amir Yaron, 2019, “The Risks in Safe Assets,” Fuqua School of Business, working paper.

Larger debt to GDP seem to lower liquidity spreads but tends to be associated with larger corporate spreads Figure 7: 8 Source: Yang Liu, Lukas Schmid, and Amir Yaron, 2019, “The Risks in Safe Assets,” Fuqua School of Business, working paper.

Beyond a certain level of debt-to-GDP (60%), R is greater than G implying increased debt may not be costless Figure 8: 9 Source: Yang Liu, Lukas Schmid, and Amir Yaron, 2019, “The Risks in Safe Assets,” Fuqua School of Business, working paper.

After Bretton Woods, the rate is almost always greater than the relevant corresponding growth Figure 9: Nominal Yield to Maturity on Government Bonds and Average Nominal GDP Growth in the Following 10 Years Germany Israel 12% 10% 10% IL GDP Growth DEU GDP Growth 8% 8% IL Bond Yields DEU Bond Yields 6% 6% 4% Bretton 4% 2% Woods 2% 0% 0% -2% Source: Israeli CBS, Bank of Israel and Macrofinance & Macrohistory Lab Source: Israeli CBS, Bank of Israel and Macrofinance & Macrohistory Lab Britain USA 18% 16% 16% 14% GBR GDP Growth USA GDP Growth 14% 12% 12% 10% GBR Bond Yields USA Bond Yields 10% 8% 8% 6% 6% Bretton Bretton 4% 4% Woods Woods 2% 2% 0% 0% 10 Source: Israeli CBS, Bank of Israel and Macrofinance & Macrohistory Lab Source: Israeli CBS, Bank of Israel and Macrofinance & Macrohistory Lab