Publication of new explanatory booklet on monetary policy-English version

07.05.02

Publication of new explanatory booklet on monetary policy:
Monetary Policy in Israel in an Era of Inflation Targets
Principles and Implementation
(English version)

The full booklet, in PDF file - 567Kb

  • The Bank of Israel has published the English version of a booklet describing the principles behind its monetary policy in an era of inflation targets-since 1992.
  • The booklet emphasizes the philosophy underlying the inflation-target policy, and deals with many issues related to monetary policy, including fiscal policy and the exchange-rate regime.
  • The booklet explains the process of arriving at interest-rate decisions, as well as economic variables which the Bank uses to assess the economy month by month.
  • The booklet is intended for the general public, as part of the transparency of monetary policy, and it is therefore written in relatively simple terms.

The Bank of Israel has published the English version of a booklet describing the principles behind its monetary policy in an era of inflation targets-from 1992 onwards. It deals with many issues related to monetary policy, and aspires to answer such questions as: What are the aims of economic policy, what part is played by fiscal policy and monetary policy in attaining them, and how do they interact? What harm is caused by inflation? Why is it important to set an inflation target? How does price stability stimulate economic growth? What effect does Israel’s economic policy have on its economic relations with other countries? What is the link between the exchange rate and monetary policy? What is the cost of disinflation? And how important is liberalization as part of this policy?

The first part of the booklet deals with the underlying philosophy of monetary policy, and the second part with its implementation. The aim of the booklet is to explain to as wide a public as possible, and not just to economists, the essence of economic policy on which the inflation-target approach is based. One of the fundamental principles of this approach is the credibility of the policy, and one of the components in establishing this credibility is transparency of monetary policy, in other words, the policy must be comprehensible to the general public. In this way a process of interactive learning takes place: the public reads and understands the messages conveyed by the Bank of Israel’s policy, and improved public understanding makes it easier to carry out monetary policy.

The author of the booklet, Weitzman Nagar, an economist in the Bank of Israel’s Monetary Department, explains that transparency is also expressed by regular reports published by the Bank, such as the Inflation Report. The periodic reports, however, focus on the events relevant to the time covered by the report and on explaining the policy adopted in that period, and they are written in language which by the nature of the subject is understood by only a narrow section of the public. This booklet, on the other hand, paints the broader picture of monetary policy and describes a wide range of economic issues related to and influencing that policy. This wide perspective is also reflected in the explanation of many concepts associated with the policy during the 1990s. In addition, in the second part of the booklet, which deals with implementation of the policy, the writer explains the process of arriving at interest-rate decisions and the economic variables according to which the Bank determines the rate of interest each month. The booklet thus provides background material for a better understanding of the Bank of Israel’s reports.

The Monetary Department notes that as the booklet is intended for a wide readership, it is written in relatively simple language, and special attention has been paid to clarifying economic terms that are not self-explanatory.

Similar publications have been issued in many other countries. The basic reason for such a booklet- transparency and the need to explain policy to the general public-is common to all of them, but the contents are presented differently; in one case the booklet is essentially pictorial and not verbal. The current booklet, which presents and explains the policy in Israel, is mainly verbal, but contains diagrams as well as amusing illustrations.