Israel 1983: A Bout of Unpleasant Monetarist Arithmetic

Sargent, Thomas J. and Zeira, Joseph (2008) Israel 1983: A Bout of Unpleasant Monetarist Arithmetic. [Working Paper]. Social Science Electronic Pub. p. 31. SSRN Working Paper Series (Submitted)

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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).

Item Type: Report / Paper (Working Paper)
Research documents and activity classification: Working Papers > Non-Refereed Working Papers / of national relevance only
Divisions: Department of Business and Management
Additional Information: An other version of the paper is available under subscription in "CEPR Discussion Paper", no. 6792, April 2008.
Uncontrolled Keywords: Inflation, Rational Expectations, Inflation Tax, Public Debt.
MIUR Scientific Area: Area 13 - Economics and Statistics > SECS-P/01 Political Economy
Deposited by: Maria Teresa Nisticò
Date Deposited: 22 Dec 2010 15:27
Last Modified: 22 Apr 2015 00:14


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