A macroeconometric model for Israel 1962-1990. A market equilibrium approach to aggregate demand and supply

We report the specification, estimation and simulation of a macroeconometric model of the Israeli economy. A distinctive feature of the model is the clear articulation of markets in terms of supply, demand and price determination. The principal markets consist of output, labor, exports, credit, money and foreign exchange. All markets are assumed to clear in the short run except the labor market which clears in the long run. The product market solves for product and for the price level relative to the exchange rate. We suggest that this is a sensible procedure for inflation-prone economies. The attention to both supply and demand imparts a 'classical' flavor to the model which is fundamentally different from earlier 'Keynesian' attempts to model the Israeli economy.