Dalia Aita

Date of Award

2020

Document Type

Thesis

Degree Name

Bachelors

Department

Social Sciences

First Advisor

Khemraj, Tarron

Area of Concentration

Quantitative Economics

Abstract

This paper investigates the relationship between the Palestinian business cycle and Israeli fiscal and monetary shocks by utilizing the Aggregate Demand and Aggregate Supply model. For this purpose, three Vector Autoregression (VAR) models are estimated as well as three Impulse Response Functions (IRFs). To estimate these models, quarterly time-series data between 1994: Q1 and 2019: Q3 is used. The Impulse Response Functions indicate an initial positive reaction of real output in the West Bank and Gaza following impulses administered to the Israeli interest rate and to the dollar price of the New Israeli Shekel, and an initial adverse reaction to an impulse to Israeli fiscal policy. We hypothesize the initial boost in real output following monetary shocks in Israel is caused by an upward shift in the Aggregate Demand curve induced by an upward shift in the Aggregate Consumption function. The increase in aggregate consumption is caused by increased purchasing power of Palestinian households, cheaper $USD loans, and slightly lower net exports deficit. On the other hand, we speculate that the initial decline in real output in response to an impulse to the Israeli fiscal deficit is due to a upward shift in the ShortRun Aggregate Supply curve induced by reduced total firm output due to a correlation between high Israeli deficits and periods of intense violence and closures of nonessential businesses in the West Bank and Gaza. Moreover, we conclude that, generally, prices in Palestine are a function of Israeli prices and thus their behavior follows the behavior of Israeli prices.

Download

Share

COinS