Working Paper: NBER ID: w1822
Authors: Michael Bruno
Abstract: On July 1 the Israeli government adopted a comprehensive emergency program for stabilization and recovery which has had dramatic consequences, at least in the very short-run. Within a few months inflation was down to 1-2 percent a month, foreign exchange reserves were rising rapidly andin spite of rather harsh contractionary fiscal and monetary policy measures average unemployment did not rise by more than 2 percentage points abovethe pre-July level.This paper deals with the background to the acute crisis of the Israeli economy and the conceptual underpinnings of the stabilization plan and with the first six months of its implementation. Apart from the more conventional fiscal and monetary policy measures, with partial deindexation, special emphasis is put on stabilization of the exchange rate, as a central nominal anchor for the price system, along with a wage policy package. Further budget restraint as well as wage moderation are considered the key for continued success of the stabilization effort. Both of these conditions will be tested in the new fiscal year starting April 1986.
Keywords: Israel; Disinflation; Economic Stabilization
JEL Codes: E31; E63; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| adoption of the emergency program (H12) | inflation rates drop (E31) |
| stabilization of the exchange rate (F31) | price system stabilization (P22) |
| budget restraint and wage moderation (E64) | continued success of stabilization effort (F51) |