The equilibrium real exchange rate for Israel

This paper analyses the equilibrium real exchange rate (ERER) for Israel. In a small open economy such as Israel, in which export flows account for 40% of GDP, the real exchange rate (RER) has an important impact on growth and stability. RER misalignments that are due to medium-term deviations of the actual exchange rate from the ERER could cause output loss and cyclical, inefficient allocation of resources, including low utilisation of factors of production. The fact that a large share of exports is based on the high-tech industry and high investment in human capital makes this concern an important policy factor.