Abstract

http://ssrn.com/abstract=1106843
 
 

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Israel 1983: A Bout of Unpleasant Monetarist Arithmetic


Thomas J. Sargent


New York University (NYU) - Department of Economics, Leonard N. Stern School of Business; National Bureau of Economic Research (NBER)

Joseph Zeira


Hebrew University of Jerusalem - Department of Economics; Centre for Economic Policy Research (CEPR); LUISS Guido Carli, DPTEA

February 2008


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).

Number of Pages in PDF File: 31

Keywords: Inflation, Rational Expectations, Inflation Tax, Public Debt

JEL Classification: E31, E50, H60

working papers series





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Date posted: April 7, 2008  

Suggested Citation

Sargent, Thomas J. and Zeira, Joseph, Israel 1983: A Bout of Unpleasant Monetarist Arithmetic (February 2008). Available at SSRN: http://ssrn.com/abstract=1106843 or http://dx.doi.org/10.2139/ssrn.1106843

Contact Information

Thomas J. Sargent
New York University (NYU) - Department of Economics, Leonard N. Stern School of Business ( email )
269 Mercer Street
New York, NY 10003
United States
212-998-3548 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Joseph Zeira
Hebrew University of Jerusalem - Department of Economics ( email )
Mount Scopus
Jerusalem 91905, IL 91905
Israel
+972 2 588 3256 (Phone)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
LUISS Guido Carli, DPTEA ( email )
viale Pola 12
Roma, Roma 00198
Italy
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