Working Paper: NBER ID: w2398
Authors: Michael Bruno; Sylvia Piterman
Abstract: The comprehensive stabilization program that Israel launched in July 1985 has brought about a dramatic reduction in inflation at no visible unemployment cost while improving the external financial position of the country. The program's success lies in a drastic cut in the government deficit but was also due to the appropriate initial synchronization of the most important nominal variables. In spite of the continued success of the stabilization program over the last two years, many problems remain. Excessive wage demands and a private consumption boom, in part the result of relative stability, have so far prevented the reduction of inflation to OECD rates. The stabilization process has also unearthed many structural problems of which an oversize public sector stands out in particular. Further reduction of inflation depends on a flexible wage policy and continued budget balance. A further cut in government expenditure and abstention from debt finance are also the key to the success of the capital market and tax reforms. These and other structural reforms will determine whether the recent upsurge in economic activity can be turned into a sustained growth process.
Keywords: inflation; stabilization; economic policy; Israel
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 |
|---|---|
| Stabilization program (E63) | Reduction in inflation rates (E31) |
| Cut in government deficit (H69) | Stabilization program success (E63) |
| Synchronization of nominal variables (E19) | Reduction in inflation rates (E31) |
| Excessive wage demands (J31) | Hindered further reductions in inflation (E31) |
| Boom in private consumption (E20) | Hindered further reductions in inflation (E31) |
| Oversize public sector (H19) | Structural issues revealed by stabilization process (C62) |