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The Inflationary Process in Israel: Shocks and Accommodation

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  • Michael Bruno
  • Stanley Fischer
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    Abstract

    The rate of inflation in Israel increased from 8 percent in 1965 to 300-400 percent in the first half of 1984. The inflationary process until 1977 was not qualitatively different from that in the OECD countries, but after the financial liberalization of 1977 the economy appeared to move into a new era in which the inflation rate seemed capable only of rising. Our explanation of the inflationary process is that because of institutional adaptations, and as a result of accommodating monetary and fiscal policies, the stabilizing forces in the economy are so weak that the inflation rate is in a meta-stable equilibrium. We ascribe the apparent asymmetry of the inflation to the expansionary underlying thrust of monetary and fiscal policy. We develop an analytical framework that assigns roles to indexation, to the financial structure, and to the exchange rate system in determining the dynamics of the economy. We place very little blame for the inflation on wage indexation, which has been incomplete, but we regard the extensive indexation of the returns on financial assets, and the steady shift out of nominal assets, as major contributing factors, for the economy is now left with virtually no nominal anchor. The paper concludes with a brief discussion of alternative stabilization plans, arguing that a successful stabilization program will have to be comprehensive and rapid.

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    File URL: http://www.nber.org/papers/w1483.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1483.

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    Date of creation: Oct 1984
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    Publication status: published as Bruno, Michael and Stanley Fischer. "The Inflationary Process in Israel: Shocks and Accomodation," The Israeli Economy, Yoram Ben-Poralt (editor), Cambridge: Harvard University Press, 1986.
    Handle: RePEc:nbr:nberwo:1483

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    References

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    1. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
    2. Stanley Fischer, 1983. "The Economy of Israel," NBER Working Papers 1190, National Bureau of Economic Research, Inc.
    3. Fischer, Stanley, 1984. "The economy of Israel," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 20(1), pages 7-52, January.
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    Cited by:
    1. Gottlieb, Daniel, 1990. "Inflation and Policy Response - The Israeli Case: 1970-1989," MPRA Paper 4114, University Library of Munich, Germany.
    2. Levent, Korap, 2006. "An empirical analysis of Turkish inflation (1988-2004): some non-monetarist estimations," MPRA Paper 19630, University Library of Munich, Germany.
    3. Michael Bruno, 1986. "Generating a Sharp Disinflation: Israel 1985," NBER Working Papers 1822, National Bureau of Economic Research, Inc.

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