The Israeli economy experienced very high inflation in the 1970s, which turned into hyperinflation in the mid-1980s. We describe the evolution of monetary policy in Israel since the implementation of the economic stabilization program of 1985, and the long road toward price stability with a floating exchange rate (ER) two decades later. The monetary policy and the ER regime evolved from ER anchoring through a dual-target regime, into a full-fledged, flexible, inflation-targeting regime. We then discuss some unique challenges and dilemmas of monetary policy making in Israel related to the high pass-through from the US$ nominal exchange-rate to the consumer price index (CPI). We also discuss the monetary policy implications of the recent sharp drop of the ER-CPI pass-through.

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