Amir Yaron is a world-renowned expert in macroeconomics, monetary economics, finance, and financial economics who got his undergraduate and masters degrees at Tel Aviv University and went on to get his Ph.D. at the University of Chicago and to become a full professor in the Finance Department at the Wharton School at the University of Pennsylvania.
Little did he know in 2024 when he was appointed to become the Governor of the Bank of Israel that he would be leaving a life of academic research and teaching to lead this small but powerful Middle East nation’s economy through some of its most trying times in the 20th century. First it was the pandemic, and the havoc it wreaked on Israel’s economy. Then two years ago, on October 7th, it was Hamas’s attack on Israel and two long, bloody, costly years of war during which the BOI managed to keep the economy growing and prevent inflation from surging as often happens when a nation is at war.
When Amir and I sit down for our interview at the International Monetary Fund and World Bank Group annual meetings in Washington D.C. it has only been six days since Israel and Hamas signed their ceasefire agreement. When I ask him what next for the BOI he doesn’t hesitate to answer.
”First of all Israel…entered the 7th of October in a very good situation, low unemployment, very high growth, low debt to GDP and inflation that was on its way back to our target which is between one and three percent,” he says. “We were to some extent a poster child of soft landing. “
Now Israel is “about five percent away from the GDP level relative to where we would have been had this horrible event hadn’t happened,” he adds. “Despite this economic cost if you zoom out and you think of what we’ve endured… the Israel economy and the Israeli public have shown remarkable resiliency.”
What now for a central bank that has run a restrictive monetary policy to keep inflation at bay, holding its key rate steady for 14 consecutive meetings and gotten some push back as a result?
Amir notes that the appreciation of the shekel, and release of <military> reserves who can now go back to jobs in the private sector are going to help dampen inflation. But then “the vapors of optimism” as the war with Hamas ends”are going to push demand up.”
”It’s hard to know how much demand will pick up, how fast the release (of reservists) will be, he says. ”Whatever we do will have to be in very cautious steps, not exactly driven by the data, but by…just driven by realilty.”
So dive in and hear what Amir has to say about not only post-war monetary policy challenges Israel faces but also importantly about the growth advantages it has now as well. “We see VC money in the last two quarters, even before the ceasefire, picking up to numbers just below the big numbers of ‘21 and ‘22, we we see consumer credit card spending is high.
Israeli economy: A display of resiliency 00:01:01:18
First of all, Israel, as I’ve said before, entered the 7th of October in a very good economic situation, low unemployment, very high growth, low debt to GDP and inflation that was on its way back into our target, which is between 1 and 3. We were to some extent poster child of soft landing. The horrible day of 7th of October happened. And if I was to say two things, cumulatively, we are about 5% away GDP level relative to where we would have been had this horrible event, didn’t happen. And we were just back on the trend that we are usually on. So that is economic cost. But yet despite this economic cost, if you zoom out and you think of what we’ve endured, an event that is 30 times nine, 11, two years of a war, you know, a lot of disputes also about this war internally. And yet the economy, the Israeli economy and the Israeli public has shown remarkable resiliency.
From bunker to beach 00:02:25:09
The economy’s functioning, the high tech sector is functioning. Part of it is we have to some extent normalized what otherwise would be a non-normal situation. You get a missile from Yemen. People go to the bunker for 15 minutes and then they’re back in the restaurants, back on the beach and back in their workforce. So this agility, mental strength and dynamism of the economy has allowed us, while we have lost obviously GDP relative to where we would have been still to function, and to have an economy that is in this context has done, relatively well.
The successful path that was chosen…00:03:04:21
The main issue has been, of course, at the beginning, very high risk premium, the shekel, depreciated - a lot of uncertainty. We on the Bank of Israel have maintained a tight, basically, restrictive monetary policy. And we’ve done well at the outset of the event. We’ve also, intervened, sold some of our reserves to help to make sure that the markets function and that allowed for calmness. And since then, basically, we’ve held rates, since the beginning of 24 at 4.5%, partly because of the uncertainty..
Solid growth, scarce labor, meant no rate cuts 00:03:37:00
And the fact and this is very important fact that now may change, is that what is at shortage in Israel is labor. We’re missing Palestinians and many, many people are doing reserve duty. When you have solid demand and negative supply of labor, prices go up. And that is the reason we have not had an easing cycle, both because of the uncertainty and that, relative to what you’ve seen in the rest of the world, I’ve just finished. You’ve got to give the government credit in some sense that they did what the Bank of Israel had really, recommended, which was throughout 24 and 25 do fiscal consolidation of 1% of GDP.
Solid, prudent, policy sends a message to markets 00:04:35:13
And in 2025, 1.5% of GDP, pretty good. In order to give a message to the market. Yeah, the war is costly, but debt to GDP is going to come up. But we have but the game plan is that it’s going to come down. We have a credible way that it doesn’t, diverge. And that kept also government borrowing rates, at reasonable, at bay.
The results of this ‘home cooking?’ 00:05:04:23
And so those, those are the actions, pretty much until now, I, inflation has come down. We just had a CPI a couple of days ago, and inflation now is at 2.5%. It kind of, most forecasters predicted at 2.8. The prior CPI was 2.9. So first of all, from a perspective, most wars are inflationary in general in general. So I’m happy to say that our, you know, our policy, just the mere fact that we are hovering around the 3%. Markets are stable. That’s a success in its own way…. The real issue is we’re going to have some release of reserves that’s going to put that plus the appreciation of the shekel.
A series of significant events… now an unwinding 00:06:01:09
Okay. So ,among the things> that have happened October7th, the Iran campaign, and now the cease fire, those are three distinct events that have, allowed the shekel to appreciate. Plus the release of reserves are going to help dampen inflation. But then the vapors of optimism are going to push demand up.
Fragile and complex evolving situation 00:06:25:20
And so you’re going to have these two offsetting effects. And we as the central bank and still things are fragile. We don’t want to put the cart ahead of the price. So we are going to have to see which of these forces work itself, and at what pace you could have. It’s hard to know how much demand will pick up, how fast the release will be. And in that sense, we are going to have to continue. Whatever we do will have to be in very cautious steps and not exactly, driven by the data, but by just driven by the reality. You don’t have every, you know, year, every ten years, every 50 years, even having to come out of a two-year war that was very disruptive and was handled very well.
Investment in Israel already has picked up 00:07:47:08
The recent data has already shown a lot of investment in Israel. We see VC money in the last two quarters, even before the ceasefire, picking up to numbers that are just slightly below the big numbers of 21 and 22, we see consumer credit card spending is high.
Could be more positive news ahead as well…collaboration? 00:08:10:07
So even in that when you think of inflation in the demand, we said we’re seeing kind of full employment and those things now we are elated that the hostages, the live hostages have come back. We want to see all the deceased hostages being brought back to Israel. But certainly there’s a sense that if this and we all hope this ceasefire proves to be sustainable, provide the lasting security and stability, those are excellent conditions for unlocking growth. And you know, there is potential for some kind of normalization. Those could certainly bring about a lot of collaboration of trades, with Arab countries, Indonesia in, in, in, in Asia and many, many other, things that are possible, but one has to get through probably, probably has to get a to get the deceased first, then go through phase two, which include the military demilitarization of Gaza.
More trade and cooperation with Arab countries and others 00:09:23:05
But to the extent that first of all, even just that happens and we get stability, that is obviously going to help growth and if we get to beyond that, that obviously brings in a lot of, potential. We can bring our high tech sector. You know, we are excellent at agro tech water and, there’s a lot of need for that. There are some of these countries that have manufacturing in which our technology can help. So there’s a lot of opportunities. But again, I want to be careful to not put the, the cart ahead of the horses. We have to go through, these phases.
Impact of the return of the reservists…00:10:14:09
How many reservists are there now? But even more so during the war, people would go in and come back and go in and come back. What if you were a small business? Maybe I would. One statistic that’s a significant number of people had to close their small businesses, right?
Wage gains are high but dynamics are not corrosive 00:10:33:16
Is it is it going to be the sort of problem, that you had to think about in the past? Is it something that might still keep, you know, wages higher or just, you know, how is that going to affect things? So maybe a few data points. The private sector wages are just kind of on an annualized basis have been close to 5%. Okay. We don’t think that’s a price you know wage price spiral. But it tells you something about the tightness of the labor market. Vacancy two unemployment is above one. We see, a lot of vacancies in construction and in food and accommodation and in services. In, in, in, in, in various areas. The real question, I, you know, clearly some households and some businesses obviously have endured very hard time.
The re-integration question(s) 00:11:24:04
Some of them were in location. They were physically had to close yet. So, the real question is how fast some, some of the reserves will come. Some of them have served hundreds of days. Maybe have lost contact with their, workplace. Maybe. Okay. Are they now ready to come back to work? So, you know, we’re going to have to monitor what is happening, from a situation where we have shortages in some sense, full, employment to perhaps a situation where it’s slightly, maybe softer or if demand comes up, then all of them will be demanded immediately.
To tolerate, how much to tolerate, that is the question 00:12:12:12
You know, there’s certain there’s regular things that all central bankers do… In terms of watching inflation versus the labor market, etc., etc. But at the end of a two year war, do people need to understand perhaps, that you’re going to have to maybe for a while, tolerate your inflation a little bit differently than you might have? You don’t want it to go up more, but you know, that you just have to say, well, maybe, maybe we’re just going to live with it, but we’re not going to be such a hurry to get inflation down. Is that something or does that, does that does it not matter? Now you’re on the new track and you got to get there. I think the fact that we’ve maintained rates for 14, decisions and we’ve shown that, just fundamental economics of what I explain. When you have a negative, when you have, you know, ample demand on the one side. And yet, shortages of labor, you know, and we see credit is flowing…
Watching and waiting 00:13:06:06
We don’t see, higher non-performing loans when you see that combination, lowering rates would have not created more economic activity. Right now, we are potentially transitioning into a different area. As I said, as some of them are coming back. But we will have to see this, maintain this balance and watch for this balance between demand and supply.
Policy wants to continue to keep inflation at bay 00:13:36:16
We certainly don’t want inflation. Inflation is currently two and a half- below the US by the way. We, we think that the forces of appreciation and the releasing of reservists, are going to support it maintaining conditions. <We will see> it coming back into balance. Because we don’t want we, we, we don’t want it to, to creep. Back up. We don’t want to ruin the good work that we’ve done. Right. Putting it, where it is. Yeah. It’s easier to keep it down than it is to have to bring it down from a higher level. I see that’s your point is excellent. And we’ve maintained saying we you don’t want to make the error of, letting inflation coming back up because fixing that is much more costly than staying, where you are.
Nature of the AI impact in Israel 00:14:44:18
I think, AI has kind of two components to it. There is sort of what I call core a AI, where there’s a lot of economies of scales, big energy, big data centers, core languages. And then there’s going to be a lot of, applied AI. And I think Israel, is going to have some in the core, but is probably going to be very good with our high tech and ingenuity actually using the of applied, periphery. And if we harness that, we are going in in terms of our high tech, that’s where I see our big, advantage. It shows up in many, many areas that we are good at cyber fintech, medtech, even defense tech, which now there’s obviously a lot of demand for it because there’s a lot of expenditure by many governments on defense and Israel has sort of proven products in that. So in that sense, I would say our high tech sector, which is kind of the locomotive engine of our economy, has shown it’s also its resiliency and has shown that it is, as I said to you before, it is well diversified. And, you know, there are new areas that it can also grow into. You mentioned reintegration, and I think this is a very important question.
The fate of Palestinian workers 00:16:39:13
That’s something that, after a very difficult, painful period, could be somehow something that that brings bring something good brings helps not just reintegrate in rebuild the the things that are needed in terms of, you know, structure, whatever. But in terms of the people and how the people are getting together, I it’s very hard to predict what the setup, the geopolitical setup is going to be. Regarding more generally, the Palestinian workers coming back to Israel, that I mean, that’s an open question that the government will have to decide in terms of its risk management. As the, as, as, as things develop and that all of these things will affect, what you said in some sense, that’s working outside of Israel. On the other hand, then coming in is more workers into Israel and that all these things can affect, the tightness of the labor market, which, again, comes back to what central banks look, both in terms of growth and both in terms of its effect potentially on prices and wages.
Hoping for stability 00:18:39:10
I would say there there’s multiple issues that one, as a central bank governor has to think about, especially, in my position where we also are the advisor to the government. So, first thing is, what’s going to be the really geopolitical next, step? As I said, we all hope there is a stable situation,
...but also planning and doing 00:20:13:04
I think there’s a lot of how do we make sure, on the one hand, that we harness this technology of blockchain and digitization and on the other hand, make sure that we don’t open ourselves to excess fragility. And I think these things are being, discussed, debated. There’s not a book that you can take off the shelf and say, yeah, it’s right there for everyone.
Technology waits for no central banker but there must be balance 00:20:41:17
And so those things are things that, one has to think, a lot about, because I think technology’s not waiting for us central banks. We tend to, to, you know, take time, but, the world is moving, and, we, we need we need to be, on the one hand, agile. And on the other hand, be sufficiently careful. So, we don’t open up to fragility points.
AMIR YARON
Professor Amir Yaron was appointed by the President of Israel as Governor of the Bank of Israel on December 24, 2018 and reappointed for a second term on December 18, 2024.
He is a world-renowned expert in macroeconomics, monetary economics, finance, and financial economics.
Prof. Yaron obtained his Bachelor’s and Master’s degrees from Tel Aviv University, and served as an officer in the unit of the Economic Advisor to the IDF Chief of General Staff. He then went abroad, where he obtained a Master’s degree and a Ph.D. at the University of Chicago. He is a full professor in the Finance Department at the Wharton School at the University of Pennsylvania, where he has held the Robert Morris Chair in Banking.
Prof. Yaron has served in a number of senior leadership positions in the academic world:
Faculty Research Associate at NBER, and one of its research group heads on capital markets and economics.
President of the Foundation for the Advancement of Research in Financial Economics (FARFE).
Member of the Board of the Western Finance Association.
Chairman of SFS Cavalcade.
Editor of a number of periodicals.
His joint study with Ravi Banzal, “Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles”, referred to in the literature as the “Bansal-Yaron Model”, is one of the leading studies worldwide regarding the interface between macroeconomics and finance. The paper was reviewed in the writings of the Nobel Prize Scientific Committee in 2013, and led to the Governor winning the prestigious Stephen Ross Award in 2019.
Professor Yaron has been a visiting scholar at the Federal Reserve Bank of Philadelphia, MIT, the University of Chicago, Goethe University, the Bank of Israel, CEMFI-Spain, IIES-Sweden, and the IMF.
