The Economy of Israel

Abstract

The paper opens with a description of the salient features of the Israeli economy. These consist of a large government sector(the government budget has absorbed more than 80% of GNP in some recent years); high levels of defense spending; a large government budget deficit; a large current account deficit (about 20%of GNP); triple digit inflation; and extensive indexation of both wages and long term financial commitments. A descriptive model of the economy is then presented, which includes the particular asset menu of the Israeli economy, and its properties examined. Finally,the rrodel is used in analyzing aspects of the Israeli inflationary experience.The currency liberalization of 1977, which increased the access of Israelis to foreign assets, shares respensibility for the high rate of inflation. The possibilities of ending the inflation are discussed.