The Bank of Israel - Vol. 1

By Haim Barkai; Nissan Liviatan | Go to book overview

4
Monetary Policy in
a Mobilized Economy

THE FLOURISHING REAL ECONOMY, 1967–69/1973

The seven-year period between the Six-Day War (June 1967) and the Yom Kippur War (October 1973) marked the coming-of-age of the central bank in more than one sense. This was expressed meaningfully in an attempt to extend monetary policy into hitherto unexplored territory, the initiation and management of open-market operations. This novelty was introduced and tested in a propitious environment for the purpose: late in the last quarter of 1966, the trough of the 1965–67 slowdown.1 Thus, the BOI acquired its first open-market experience during the recovery phase of what turned into the “seven good years” of the Israeli economy, a time of roaring prosperity. The experiment foundered in the overfull employment and accelerating inflation phase of the cycle from 1970 onward.


Growth Performance and the Balance of Payments

In the immediate aftermath of the Six-Day War—the third and fourth quarters of 1967—the system pulled out of its slump, which had been marked by an unemployment rate of more than 10%, and began to expand at rates that soon surpassed 10%. The average annual GDP growth rate during the eighty-one months ending on October 1, 1973, was almost 10%. Gross product of the business sector grew even faster. So did investment and consumption expenditure (table 4.1).

This long-term process was sustained by higher growth rates of resources available to the economy than of GDP. As resources increased by 11% on annual average during this period, the import surplus bulged again (figure 4.1).

-107-

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