Israel 1983: A Bout of Unpleasant Monetarist Arithmetic

33 Pages Posted: 12 Jun 2008

See all articles by Thomas J. Sargent

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

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Date Written: April 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).

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

JEL Classification: E31, E50, H60

Suggested Citation

Sargent, Thomas J. and Zeira, Joseph, Israel 1983: A Bout of Unpleasant Monetarist Arithmetic (April 2008). CEPR Discussion Paper No. DP6792, Available at SSRN: https://ssrn.com/abstract=1142174

Thomas J. Sargent (Contact Author)

New York University (NYU) - Department of Economics, Leonard N. Stern School of Business ( email )

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New York, NY 10003
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212-998-3548 (Phone)

National Bureau of Economic Research (NBER)

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Joseph Zeira

Hebrew University of Jerusalem - Department of Economics ( email )

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Israel
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Centre for Economic Policy Research (CEPR)

London
United Kingdom

LUISS Guido Carli, DPTEA ( email )

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Italy

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