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Israel 1983: A Bout of Unpleasant Monetarist Arithmetic

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  • Sargent, Thomas J
  • Zeira, Joseph

Abstract

From 1970 to 1985, Israel experienced high inflation. It rose in three jumps to new plateaus and eventually exceeded 400% per annum. This paper claims that anticipated monetary and fiscal effects of a massive government bailout of owners of fallen bank shares caused the last big jump in inflation that occurred in October 1983. Bank shares had just collapsed after a scandal in which it was revealed that banks had long manipulated their share prices. The government promised to reimburse innocent owners for the diminished value of their bank shares, but only after four or five years. The public believed that promise and public debt therefore implicitly increased by a large amount. That implied future monetary expansions. Because that was foreseen, inflation immediately rose as predicted by the unpleasant monetarist arithmetic of Sargent and Wallace (1981).

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6792.

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Date of creation: Apr 2008
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Handle: RePEc:cpr:ceprdp:6792

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Keywords: Inflation; Inflation Tax; Public Debt; Rational Expectations;

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  1. Bental, B. & Eckstein, Z., 1988. "The Dynamics Of Inflation With Constant Deficit Under Expected Regime Change," Papers 35-88, Tel Aviv.
  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, 2009. "The Conquest of South American Inflation," Journal of Political Economy, University of Chicago Press, vol. 117(2), pages 211-256, 04.
  4. Sussman, Oren, 1992. "Financial Liberalization: The Israeli Experience," Oxford Economic Papers, Oxford University Press, vol. 44(3), pages 387-402, July.
  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. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
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Cited by:
  1. Stephen Cecchetti & Madhusudan Mohanty & Fabrizio Zampolli, 2010. "The future of public debt: prospects and implications," BIS Working Papers 300, Bank for International Settlements.

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