The struggle toward macroeconomic stability: An analytical essay

This essay offers an economic-history perspective of the long struggle toward macroeconomic stability in Israel. The purpose is to provide a broad analytical overview of major exogenous shocks and shifts in macroeconomic policy and institutions in Israel from the 1977-85 great inflation to the global financial crisis, and the effects of those shifts on long-term growth, inflation, the business cycle, the flattening of the Phillips curve, and other related economic developments. The paper addresses three main topics. The first one is the political economics of the hyperinflation crisis, its crushing by a national-unity coalition, and its impact on subsequent reform of financial and monetary institutions. Inflation’s history points to the weak foundation of the Modern Monetary Theory, or MMT, which argues that a country borrowing in its own currency can finance fiscal stimulus by printing money in a persistent way. Second is the impact of globalization on economic activity, inflation, and the Phillips curve during the “great Moderation” period. The third is Israel’s relatively robust performance during the 2008 global crisis, the role of the financial sector stance, and the central bank foreign exchange market intervention policies.