The Bank of Israel - Vol. 1

By Haim Barkai; Nissan Liviatan | Go to book overview

10
The 1985 Stabilization Policy

As noted earlier, the 1985 stabilization, in contrast to earlier attempts, was carried out by a National Unity Government that commanded a massive majority in the Knesset (parliament). This government viewed the elimination of inflation as one of its main targets. At its helm as prime minister stood Shimon Peres, the leader of the Labor Alignment, representing the Labor Movement.1 By his side, as minister of finance, was Yizhak Moda’i of the liberal wing of the Likud Party. They were assisted by the intellectual guidance of Michael Bruno (subsequently governor of the BOI) and the organizational skill of Emanuel Sharon, Director General of the Ministry of Finance, who took care of the implementation of the program. This team deserves the main credit for the success of the program, although some credit also goes to the economists of the BOI, the Finance Ministry, and academia.2


BASIC PRINCIPLES OF THE PROGRAM

The 1985 stabilization policy was based on several principles that would have lasting effects on the economy. The first was the establishment of fiscal balance and perseverance in fiscal discipline in future years, in order to make the reduction of the debt/GDP ratio feasible. The second principle was the necessity of dealing simultaneously with the balance-of-payments (BOP) and inflation issues within the framework of a nominal anchor. This course of action was also supposed to halt the wage-price-exchange-rate spiral and put an end to the use of surprise-inflation tactics. The third principle was the implementation of a drastic (“cold turkey”) disinflation policy focusing on the macroeconomic dimension and leaving structural reforms to later stages of the process.

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