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Israel's Stabilization Program of 1985, or Some Simple Truths of Monetary Theory

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  • Don Patinkin
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    Abstract

    Within 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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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.7.2.103
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    Bibliographic Info

    Article provided by American Economic Association in its journal Journal of Economic Perspectives.

    Volume (Year): 7 (1993)
    Issue (Month): 2 (Spring)
    Pages: 103-128

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    Handle: RePEc:aea:jecper:v:7:y:1993:i:2:p:103-28

    Note: DOI: 10.1257/jep.7.2.103
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    Cited by:
    1. Beenstock, Michael & Azoulay, Eddy & Offenbacher, Akiva & Sulla, Olga, 2003. "A macroeconometric model with oligopolistic banks: monetary control, inflation and growth in Israel," Economic Modelling, Elsevier, vol. 20(3), pages 455-486, May.
    2. Garcia, Marcio G. P., 1996. "Avoiding some costs of inflation and crawling toward hyperinflation: The case of the Brazilian domestic currency substitute," Journal of Development Economics, Elsevier, vol. 51(1), pages 139-159, October.
    3. Acar, Sevil & Dogruel, Fatma, 2012. "Sources of inequality in selected MENA countries," Structural Change and Economic Dynamics, Elsevier, vol. 23(3), pages 276-285.
    4. Michael Mussa & Robert P. Flood, 1994. "Issues Concerning Nominal Anchors for Monetary Policy," IMF Working Papers 94/61, International Monetary Fund.
    5. Prof.Dr. Cevat GERNI & Doc.Dr. O. Selcuk EMSEN & Dr. M. Kemal DEGER, 2005. "Erken Uyari Sistemlerý Yoluyla Turkiye’Deki Ekonomik Krizlerin Analizi," Istanbul University Econometrics and Statistics e-Journal, Department of Econometrics, Faculty of Economics, Istanbul University, vol. 2(1), pages 39-62, November.
    6. PEKARSKI, Sergei, 2008. "Budget deficits and inflation feedback," CORE Discussion Papers 2008054, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    7. Patrick Honohan, 1994. "The Fiscal Approach to Financial Intermediation Policy," Papers WP049, Economic and Social Research Institute (ESRI).

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