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How Israel avoided hyperinflation. The success of its 1985 stabilization plan in the light of post-Keynesian theory

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  • Sébastien Charles
  • Jonathan Marie

Abstract

This article uses a post-Keynesian framework to analyse the inflationary process at work from 1948 until the 1980s in an attempt to understand the origins of the near-hyperinflation of the first semester 1985 and the success of the stabilization plan introduced that same summer. In 1985 the shekel seems to have been entirely abandoned by its users for the U.S. dollar, which, in the context of high inflation of the time should have caused hyperinflation. Such an outcome results from the conjunction of several factors: the historic virulence of the distribution conflict, the presence of indexation mechanisms, and the fragility of the balance of payments marked by a structural current deficit. The stabilization plan, supported by substantial U.S. financial aid, immediately attenuated the external financing constraint and lastingly eased the distribution conflict, thereby averting the hyperinflationary risks. Analysis of this historical trajectory confirms the theoretical coherence of the post-Keynesian analysis of hyperinflation.

Suggested Citation

  • 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.
    • Handle: RePEc:taf:rripxx:v:28:y:2021:i:3:p:528-558
    DOI: 10.1080/09692290.2019.1699146
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