Journal of Economic Perspectives
ISSN 0895-3309 (Print) | ISSN 1944-7965 (Online)
Israel's Stabilization Program of 1985, or Some Simple Truths of Monetary Theory
Journal of Economic Perspectives
vol. 7,
no. 2, Spring 1993
(pp. 103–128)
(Complimentary)
Abstract
Within a period of two months, and with minimal adverse effects on employment and the real functioning of the economy, Israel's 1985 stabilization program reduced the annual rate of inflation from close to 500 percent to less than 20 percent (corresponding, respectively, to average compounded monthly rates of 16.1 and 1.5 percent) and has maintained that situation until now (1992). The major purpose of this paper is to use this inflationary experience as an illustration of some of the simple truths of traditional monetary theory. At the same time, this experience also illustrates the advantages of a heterodox policy (that is, one that, in addition to restrictive monetary and fiscal measures, makes temporary use of wage and price controls, often within the context of a "social contract") in bringing an inflationary process to an end. A second purpose is to explain the unique political circumstances that—despite the aforementioned earlier failures—created the credibility that enabled the 1985 program to succeed.Citation
Patinkin, Don. 1993. "Israel's Stabilization Program of 1985, or Some Simple Truths of Monetary Theory." Journal of Economic Perspectives, 7 (2): 103–128. DOI: 10.1257/jep.7.2.103JEL Classification
- E63 Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization Policy
- E52 Monetary Policy
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