The Inflationary Process in Israel: Shocks and Accommodation

Abstract

Israel's annual inflation rate increased from 8 percent in 1965 to 300-400 percent in the first half of 1984.Up to 1977, the process of inflation in Israel does not appear qualitatively different from that in the OECD countries (see Bruno in this volume).Indeed, even after it jumped to 40-50 percent after the Yom Kippur War, the inflation rate declined slowly until, by the first half of 1977, prices were rising at an annual rate of 25 percent.After the financial liberalization of late 1977, the economy appeared to move into a new era, with inflation firmly entrenched, and seemingly capable only of rising.In this paper we provide an overview and analysis of the inflationary process, seeking to explain the increases in the inflation rate and the forces that keep it high and, on occasion, rising.There has been no shortage of explanations of inflation: it has been ascribed to indexation, to monetary policy, to the budget deficit, to the introduction of floating exchange rates, to "bubbles"self-justifying expectations of inflation - to name only some of the most prominent.Several of these explanations provide necessary conditions for the continuation of the process, as we shall show below.

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