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Generating a Sharp Disinflation: Israel 1985

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  • Michael Bruno
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    Abstract

    On July 1 the Israeli government adopted a comprehensive emergency program for stabilization and recovery which has had dramatic consequences, at least in the very short-run. Within a few months inflation was down to 1-2 percent a month, foreign exchange reserves were rising rapidly andin spite of rather harsh contractionary fiscal and monetary policy measures average unemployment did not rise by more than 2 percentage points abovethe pre-July level.This paper deals with the background to the acute crisis of the Israeli economy and the conceptual underpinnings of the stabilization plan and with the first six months of its implementation. Apart from the more conventional fiscal and monetary policy measures, with partial deindexation, special emphasis is put on stabilization of the exchange rate, as a central nominal anchor for the price system, along with a wage policy package. Further budget restraint as well as wage moderation are considered the key for continued success of the stabilization effort. Both of these conditions will be tested in the new fiscal year starting April 1986.

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    File URL: http://www.nber.org/papers/w1822.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1822.

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    Date of creation: Jan 1986
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    Publication status: published as Economic Policy, vol. 2, pp 379-402, 1986.
    Handle: RePEc:nbr:nberwo:1822

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    1. Melnick, Rafi & Sokoler, Meir, 1984. "The government's revenue from money creation and the inflationary effects of a decline in the rate of growth of G.N.P," Journal of Monetary Economics, Elsevier, vol. 13(2), pages 225-236, March.
    2. Thomas J. Sargent, 1981. "The ends of four big inflations," Working Papers 158, Federal Reserve Bank of Minneapolis.
    3. Horn, Henrik & Persson, Torsten, 1988. "Exchange rate policy, wage formation and credibility," European Economic Review, Elsevier, vol. 32(8), pages 1621-1636, October.
    4. Michael Bruno & Stanley Fischer, 1984. "The Inflationary Process in Israel: Shocks and Accommodation," NBER Working Papers 1483, National Bureau of Economic Research, Inc.
    5. Rudiger Dornbusch, 1987. "Stopping Hyperinflation: Lessons from the German Inflation Experience of the 1920s," NBER Working Papers 1675, National Bureau of Economic Research, Inc.
    6. Zalman F. Shiffer, 1982. "Money and inflation in Israel: the transition of an economy to high inflation," Review, Federal Reserve Bank of St. Louis, issue Aug, pages 28-40.
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