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Israel 1983: A Bout of Unpleasant Monetarist Arithmetic

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  • Sargent, Thomas
  • Zeira, Joseph

Abstract

From 1970 to 1985, Israel experienced high inflation. It rose in three jumps to new plateaus and eventually exceeded 400% per annum. This paper claims that anticipated monetary and fiscal effects of a massive government bailout of owners of fallen bank shares caused the last big jump in inflation that occurred in October 1983. Bank shares had just collapsed after a scandal in which it was revealed that banks had long manipulated their share prices. The government promised to reimburse innocent owners for the diminished value of their bank shares, but only after four or five years. The public believed that promise and public debt therefore implicitly increased by a large amount. That implied future monetary expansions. Because that was foreseen, inflation immediately rose as predicted by the unpleasant monetarist arithmetic of Sargent and Wallace (1981).

Suggested Citation

  • Sargent, Thomas & Zeira, Joseph, 2008. "Israel 1983: A Bout of Unpleasant Monetarist Arithmetic," CEPR Discussion Papers 6792, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:6792
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    References listed on IDEAS

    as
    1. Thomas J. Sargent & Neil Wallace, 1984. "Some Unpleasant Monetarist Arithmetic," Palgrave Macmillan Books, in: Brian Griffiths & Geoffrey E. Wood (ed.), Monetarism in the United Kingdom, pages 15-41, Palgrave Macmillan.
    2. Zeira, Joseph, 1989. "Inflationary inertia in a wage-price spiral model," European Economic Review, Elsevier, vol. 33(8), pages 1665-1683, October.
    3. Thomas Sargent & Noah Williams & Tao Zha, 2009. "The Conquest of South American Inflation," Journal of Political Economy, University of Chicago Press, vol. 117(2), pages 211-256, April.
    4. Bental, Benjamin & Eckstein, Zvi, 1990. "The Dynamics of Inflation with Constant Deficit under Expected Regime Change," Economic Journal, Royal Economic Society, vol. 100(403), pages 1245-1260, December.
    5. Allan Drazen & Elhanan Helpman, 1987. "Stabilization with Exchange Rate Management," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(4), pages 835-855.
    6. Sussman, Oren, 1992. "Financial Liberalization: The Israeli Experience," Oxford Economic Papers, Oxford University Press, vol. 44(3), pages 387-402, July.
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    Citations

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    Cited by:

    1. Sébastien Charles & Jonathan Marie, 2021. "How Israel avoided hyperinflation. The success of its 1985 stabilization plan in the light of post-Keynesian theory," Review of International Political Economy, Taylor & Francis Journals, vol. 28(3), pages 528-558, May.
    2. Snir, Avichai & Chen, Haipeng (Allan) & Levy, Daniel, 2021. "Stuck at Zero: Price Rigidity in a Runaway Inflation," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, issue forthcomi.
    3. Stephen Cecchetti & Madhusudan Mohanty & Fabrizio Zampolli, 2010. "The future of public debt: prospects and implications," BIS Working Papers 300, Bank for International Settlements.

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    More about this item

    Keywords

    inflation; Inflation tax; Public debt; Rational expectations;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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