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Israel 1983: A bout of unpleasant monetarist arithmetic?

Thomas Sargent () and Joseph Zeira ()

Review of Economic Dynamics, 2011, vol. 14, issue 3, 419-431

Abstract: This paper claims that anticipations of a promised 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 innocent 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 a future monetary expansion. That sparked an immediate jump in inflation via the unpleasant monetarist arithmetic of Sargent and Wallace (1981). (Copyright: Elsevier)

Keywords: Inflation; Rational expectations; Inflation tax model; Unpleasant monetarist arithmetic (search for similar items in EconPapers)
JEL-codes: E31 E50 H68 (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1016/j.red.2011.03.002

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