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Israel 1983: A bout of unpleasant monetarist arithmetic?

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Author Info

  • Thomas Sargent

    (New York University)

  • Joseph Zeira

    (Hebrew University)

Abstract

This paper claims that anticipations of a promised massive future government bailout of owners of fallen bank shares suddenly caused a big jump in inflation in Israel in October 1983. That month, the government promised that four or five years later it would compensate innocent people for the fall in the value of their bank shares. We reason that the public believed that promise, that it understood that the public debt must jump, and further that the public anticipated that the government would finance that debt via a future monetary expansion. That sparked an immediate jump in inflation via the unpleasant monetarist arithmetic of Sargent and Wallace (1981). (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2011.03.002
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 14 (2011)
Issue (Month): 3 (July)
Pages: 419-431

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Handle: RePEc:red:issued:08-166

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Related research

Keywords: Inflation; Rational expectations; Inflation tax model; Unpleasant monetarist arithmetic;

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  1. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  2. Zeira, Joseph, 1989. "Inflationary inertia in a wage-price spiral model," European Economic Review, Elsevier, vol. 33(8), pages 1665-1683, October.
  3. Thomas Sargent & Noah Williams & Tao Zha, 2006. "The conquest of South American inflation," Working Paper 2006-20, Federal Reserve Bank of Atlanta.
  4. Bental, Benjamin & Eckstein, Zvi, 1990. "The Dynamics of Inflation with Constant Deficit under Expected Regime Change," Economic Journal, Royal Economic Society, vol. 100(403), pages 1245-60, December.
  5. Drazen, Allan & Helpman, Elhanan, 1987. "Stabilization with Exchange Rate Management," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 835-55, November.
  6. Sussman, Oren, 1992. "Financial Liberalization: The Israeli Experience," Oxford Economic Papers, Oxford University Press, vol. 44(3), pages 387-402, July.
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