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Fiscal Dominance and Monetary Dominance in the Israeli Monetary Experience

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  • Nissan Liviatan

    (Bank of Israel)

Abstract

This paper analyzes the monetary history of Israel in the framework of the concepts of fiscal dominance (FD) and monetary dominance (MD), which appeared in the recent macroeconomic models. It is shown that the inflationary period in Israel (1973 85) had distinct features of FD while the periods before and after the foregoing period can be characterized as belonging to a regime of MD. In this analysis we draw a distinction between solvencey of the public sector (which is based on the discounted public debt) and sustainability (which is based on the undiscounted debt). We also extend the concept of the Pigou effect to cover the price shocks that followed balance of payments crises. We claim that in the absence of a nominal anchor (which characterizes FD), these shocks entail increases in the inflation plateau. After the stabilization of 1985 (and especially in the nineties) the economic regime changed to MD, being based on a sustainable path of the public debt and on an inflation target regime.

Suggested Citation

  • Nissan Liviatan, 2003. "Fiscal Dominance and Monetary Dominance in the Israeli Monetary Experience," Bank of Israel Working Papers 2003.17, Bank of Israel.
    • Handle: RePEc:boi:wpaper:2003.17
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    References listed on IDEAS

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    Cited by:

    1. Tersoo Shimonkabir SHITILE & Abubakar SULE, 2019. "Welfare Effect of Monetary Financing," Applied Economics and Finance, Redfame publishing, vol. 6(5), pages 145-157, September.
    2. Barrie, Mohamed Samba & Jackson, Emerson Abraham, 2022. "The impact of fiscal dominance on macroeconomic performance in Sierra Leone: a DSGE simulation approach," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 22(1), pages 1-33.
    3. Meir Sokoler, 2005. "Globalisation and its effects on monetary policy: the case of Israel," BIS Papers chapters, in: Bank for International Settlements (ed.), Globalisation and monetary policy in emerging markets, volume 23, pages 176-85, Bank for International Settlements.
    4. Itamar Caspi, 2015. "Testing for a housing bubble at the national and regional level: the case of Israel," Globalization Institute Working Papers 246, Federal Reserve Bank of Dallas.
    5. Bank for International Settlements, 2005. "Foreign exchange market intervention in emerging markets: motives, techniques and implications," BIS Papers, Bank for International Settlements, number 24.
    6. Meir Sokoler, 2005. "Approaching a decade of no foreign exchange intervention - lessons from Israel," BIS Papers chapters, in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 188-95, Bank for International Settlements.
    7. Argov, Eyal & Binyamini, Alon & Elkayam, David & Rozenshtrom, Irit, 2007. "A Small Macroeconomic Model to Support Inflation Targeting in Israel," MPRA Paper 4784, University Library of Munich, Germany.
    8. Bank for International Settlements, 2005. "Globalisation and monetary policy in emerging markets," BIS Papers, Bank for International Settlements, number 23.

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