Israel's Stabilization Program of 1985, or Some Simple Truths of Monetary Theory
AbstractWithin a period of two months, and with minimal adverse effects on employment and the real functioning of the economy, Israel's 1985 stabilization program reduced the annual rate of inflation from close to 500 percent to less than 20 percent (corresponding, respectively, to average compounded monthly rates of 16.1 and 1.5 percent) and has maintained that situation until now (1992). The major purpose of this paper is to use this inflationary experience as an illustration of some of the simple truths of traditional monetary theory. At the same time, this experience also illustrates the advantages of a heterodox policy (that is, one that, in addition to restrictive monetary and fiscal measures, makes temporary use of wage and price controls, often within the context of a "social contract") in bringing an inflationary process to an end. A second purpose is to explain the unique political circumstances that—despite the aforementioned earlier failures—created the credibility that enabled the 1985 program to succeed.
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Bibliographic InfoArticle provided by American Economic Association in its journal Journal of Economic Perspectives.
Volume (Year): 7 (1993)
Issue (Month): 2 (Spring)
Find related papers by JEL classification:
- E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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