Adoption of the Inflation Targeting Regime Globally and its Implementation in Israel

03/02/2020 |  Offenbacher Akiva (Edward), Elkayam David
All Press Releases In Subject:
Monetary Policy and Inflation
Abstract:

This paper surveys the adoption of inflation targeting regimes in the world and in Israel. In the years 1990 to 1993, four advanced economies (henceforth the "pioneering countries") – New Zealand, Canada, Britain and Sweden – adopted the inflation targeting regime. This regime included a number of elements: (a) a specific decision, agreed to and announced by the authorities, that the primary objective of the central bank is to achieve price stability and maintain it over time; (b) the establishment of intermediate targets for inflation with ongoing, determined action to attain them; (c) communication with the public including transparency and accountability. The objective of the regime is to engender strong credibility within the public about the commitment of the authorities to strive for price stability, thereby minimizing the real costs involved in attaining this goal.

In contrast with the decisive and effective implementation of this monetary regime in the world, the adoption of the inflation targeting regime in Israel was drawn out and complicated. Albeit, already at the end of 1991, the Bank of Israel announced an inflation target for 1992 but this announcement was merely a marginal ingredient in a modification of the existing exchange rate regime and not adoption of the full inflation targeting regime. Only after trial and error for a decade, marked by high inflation volatility and numerous professional and political disagreements, were the additional components of the inflation targeting regime gradually adopted and price stability was attained. The two primary reasons for the extended duration of the process of adopting the inflation targeting regime in Israel were: (a) the lack of a clear division of tasks and authority between the government and the Bank of Israel and (b) the Bank of Israel itself had to alter its basic approach to the conduct of monetary policy, Continual monetary restraint from 1994 through 1998, accompanied by a significant broadening of the exchange rate target zone in mid-1997, brought about a sizable reduction in inflation to 4% in 1997 compared with 10% in the previous two years, thus paving the road towards price stability​

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