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Macroeconomic performance before and after disinflation in Israel

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  • Leiderman, Leonardo
  • Liviatan, Nissan
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    Abstract

    The Israeli stabilization program of 1985 is generally considered one of the most successful such programs in years. Under it, the inflation rate plummeted from about 400 percent a year to about 15-20 percent a year. This paper examines how stabilization affected other key economic variables after 1985. The authors particularly struck by the immediate, abrupt reduction in the rate of inflation and the timing and impact of disinflation on other real variables. For more than two years after the program, a private consumption boom was accompanied by increased economic activity, relatively high real wages and real interest rates, and a low real exchange rate. The recent rise in unemployment seems to reflect the beginning of a process of structural adjustment whereby resources are reallocated across the economy. This process will allow an increase in long term growth after adjustment is completed. In reducing inflation, the program seems to have had the same effectiveness as other shock treatment programs; a sharp and immediate disinflation. In terms of the real costs of disinflation, the program may seem more gradualist. The real costs, in terms of increased unemployment, were postponed for several years and in the transition there was actually a boom in economic activity.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 311.

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    Date of creation: 30 Nov 1989
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    Handle: RePEc:wbk:wbrwps:311

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    Related research

    Keywords: Economic Theory&Research; Environmental Economics&Policies; Economic Stabilization; Macroeconomic Management; Statistical&Mathematical Sciences;

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    1. Garber, Peter M., 1982. "Transition from inflation to price stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 16(1), pages 11-42, January.
    2. Elhanan Helpman, 1987. "Macroeconomic Effects of Price Controls: The Role of Market Structure," NBER Working Papers 2434, National Bureau of Economic Research, Inc.
    3. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 893-920, October.
    4. Rudiger Dornbusch, 1980. "Exchange Rate Rules and Macroeconomic Stability," NBER Working Papers 0473, National Bureau of Economic Research, Inc.
    5. Helpman, Elhanan & Razin, Assaf, 1987. "Exchange Rate Management: Intertemporal Tradeoffs," American Economic Review, American Economic Association, vol. 77(1), pages 107-23, March.
    6. Cukierman, Alex, 1983. "Relative price variability and inflation: A survey and further results," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 19(1), pages 103-157, January.
    7. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
    8. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
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