Israel 1983: A bout of unpleasant monetarist arithmetic

Thomas J. Sargent, Joseph Zeira

    Research output: Contribution to journalArticlepeer-review

    Abstract

    This paper claims that anticipations of a massive future government bailout of owners of fallen bank shares suddenly caused a big jump in inflation in Israel in October 1983. That month, the government promised that four or five years later it would compensate people for the fall in the value of their bank shares. We reason that the public believed that promise, that it understood that the public debt must jump, and further that the public anticipated that the government would finance that debt via an eventual monetary expansion. That sparked an immediate jump in inflation via the unpleasant monetarist arithmetic of Sargent and Wallace (1981).

    Original languageEnglish (US)
    Pages (from-to)419-431
    Number of pages13
    JournalReview of Economic Dynamics
    Volume14
    Issue number3
    DOIs
    StatePublished - Jul 2011

    Keywords

    • Inflation
    • Inflation tax model
    • Rational expectations
    • Unpleasant monetarist arithmetic

    ASJC Scopus subject areas

    • Economics and Econometrics

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