Macroeconomic performance before and after disinflation in Israel
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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