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Israel's Stabilization Program of 1985, or Some Simple Truths of Monetary Theory

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  • Don Patinkin

Abstract

Within a period of two months, and with minimal adverse effects on employment and the real functioning of the economy, Israel's 1985 stabilization program reduced the annual rate of inflation from close to 500 percent to less than 20 percent (corresponding, respectively, to average compounded monthly rates of 16.1 and 1.5 percent) and has maintained that situation until now (1992). The major purpose of this paper is to use this inflationary experience as an illustration of some of the simple truths of traditional monetary theory. At the same time, this experience also illustrates the advantages of a heterodox policy (that is, one that, in addition to restrictive monetary and fiscal measures, makes temporary use of wage and price controls, often within the context of a "social contract") in bringing an inflationary process to an end. A second purpose is to explain the unique political circumstances that—despite the aforementioned earlier failures—created the credibility that enabled the 1985 program to succeed.

Suggested Citation

  • Don Patinkin, 1993. "Israel's Stabilization Program of 1985, or Some Simple Truths of Monetary Theory," Journal of Economic Perspectives, American Economic Association, vol. 7(2), pages 103-128, Spring.
  • Handle: RePEc:aea:jecper:v:7:y:1993:i:2:p:103-28
    Note: DOI: 10.1257/jep.7.2.103
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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.7.2.103
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    Cited by:

    1. Pekarski, Sergey, 2011. "Budget deficits and inflation feedback," Structural Change and Economic Dynamics, Elsevier, vol. 22(1), pages 1-11, February.
    2. Garcia, Marcio G. P., 1996. "Avoiding some costs of inflation and crawling toward hyperinflation: The case of the Brazilian domestic currency substitute," Journal of Development Economics, Elsevier, vol. 51(1), pages 139-159, October.
    3. Jun-Hyun Ko & Hiroshi Morita, "undated". "How does hyperinflation shock the economy?: Panel VAR Approach," Working Papers e90, Tokyo Center for Economic Research.
    4. Salar, Laleena & Zaman, Khalid & Khilji, Bashir Ahmad & Khan, Muhammad Mushtaq & Lodhi, Mohammad Saeed, 2013. "The consequences of revenue gap in Pakistan: Unveiling the reality," Economic Modelling, Elsevier, vol. 30(C), pages 281-294.
    5. Andrew M. Warner, 2014. "Public Investment as an Engine of Growth," IMF Working Papers 14/148, International Monetary Fund.
    6. Akhand Akhtar Hossain, 2009. "Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 12777, April.
    7. Acar, Sevil & Dogruel, Fatma, 2012. "Sources of inequality in selected MENA countries," Structural Change and Economic Dynamics, Elsevier, vol. 23(3), pages 276-285.
    8. Checherita-Westphal, Cristina & Žďárek, Václav, 2017. "Fiscal reaction function and fiscal fatigue: evidence for the euro area," Working Paper Series 2036, European Central Bank.
    9. Robert Flood & Michael Mussa, 1994. "Issues Concerning Nominal Anchors for Monetary Policy," NBER Working Papers 4850, National Bureau of Economic Research, Inc.
    10. Beenstock, Michael & Azoulay, Eddy & Offenbacher, Akiva & Sulla, Olga, 2003. "A macroeconometric model with oligopolistic banks: monetary control, inflation and growth in Israel," Economic Modelling, Elsevier, vol. 20(3), pages 455-486, May.
    11. Nikolai Stähler, 2009. "Taxing Deficits to Restrain Government Spending," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 11(1), pages 159-176, February.
    12. Patrick Honohan, 1994. "The Fiscal Approach to Financial Intermediation Policy," Papers WP049, Economic and Social Research Institute (ESRI).
    13. Prof.Dr. Cevat GERNI & Doc.Dr. O. Selcuk EMSEN & Dr. M. Kemal DEGER, 2005. "Erken Uyari Sistemlerý Yoluyla Turkiye’Deki Ekonomik Krizlerin Analizi," Istanbul University Econometrics and Statistics e-Journal, Department of Econometrics, Faculty of Economics, Istanbul University, vol. 2(1), pages 39-62, November.

    More about this item

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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