The Bank of Israel - Vol. 1

By Haim Barkai; Nissan Liviatan | Go to book overview

Overview

Israel’s monetary history, originating in the first post-World War II decade, was geared to and influenced by that era, which was characterized by moderate inflation in leading industrial countries and high rates of inflation in Latin America. As the last decade of the twentieth century saw the demise of chronic inflation in Latin America and, in fact, inflation worldwide appeared to phase out, Israel joined the trend.

Thus, in the fifty years since the establishment of the Bank of Israel in December 1954, Israel has come full circle on inflation. Initially, from the mid1950s through 1960, inflation ran at low single-digit rates. Such rates were regained only in the closing phase of the 1990s, and effective price-level stability did not follow until the succeeding decade, that is, the first years of the twentyfirst century. In between, inflation soared to a threshold of double digits in the first half of the 1960s, made a brief three-year retreat to low single digits, and took off again in the early 1970s, promptly crossing the double-digit barrier. Inflation crossed into triple-digit territory at the end of that decade and accelerated to almost hyperinflation by the first two quarters of 1985. The stabilization policy of 1985 pulled the system back from the brink and a decade at low double-digit rates furthered the transition to price stability at the turn of the millennium.

This study surveys the macroeconomic developments linked to this inflation cycle and provides an analytic framework for their analysis. From this perspective, the story—the full circle of inflation—begins in the mid-1950s, when Israel’s economy was run on the basis of monetary dominance pegged to the Bretton Woods system of fixed exchange rates, which gave the country a nominal anchor.1 In the 1970s, the economy switched effectively to a regime of

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