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Israel 1983: A bout of unpleasant monetarist arithmetic?

Author

Listed:
  • Thomas Sargent

    (New York University)

  • Joseph Zeira

    (Hebrew University)

Abstract

This paper claims that anticipations of a promised massive future government bailout of owners of fallen bank shares suddenly caused a big jump in inflation in Israel in October 1983. That month, the government promised that four or five years later it would compensate innocent people for the fall in the value of their bank shares. We reason that the public believed that promise, that it understood that the public debt must jump, and further that the public anticipated that the government would finance that debt via a future monetary expansion. That sparked an immediate jump in inflation via the unpleasant monetarist arithmetic of Sargent and Wallace (1981). (Copyright: Elsevier)

Suggested Citation

  • Thomas Sargent & Joseph Zeira, 2011. "Israel 1983: A bout of unpleasant monetarist arithmetic?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(3), pages 419-431, July.
  • Handle: RePEc:red:issued:08-166
    DOI: 10.1016/j.red.2011.03.002
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    File URL: http://dx.doi.org/10.1016/j.red.2011.03.002
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    References listed on IDEAS

    as
    1. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    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, April.
    4. Sussman, Oren, 1992. "Financial Liberalization: The Israeli Experience," Oxford Economic Papers, Oxford University Press, vol. 44(3), pages 387-402, July.
    5. Allan Drazen & Elhanan Helpman, 1987. "Stabilization with Exchange Rate Management," The Quarterly Journal of Economics, Oxford University Press, vol. 102(4), pages 835-855.
    6. Bental, Benjamin & Eckstein, Zvi, 1990. "The Dynamics of Inflation with Constant Deficit under Expected Regime Change," Economic Journal, Royal Economic Society, vol. 100(403), pages 1245-1260, December.
    Full references (including those not matched with items on IDEAS)

    Citations

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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.

    More about this item

    Keywords

    Inflation; Rational expectations; Inflation tax model; Unpleasant monetarist arithmetic;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt

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    1. יוסף זעירא in Wikipedia Hebrew ne '')

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