If the economies, which suffered from the crisis, had expected it, the crisis would probably never have developed in the first place. The third section describes the shock of world financial turmoil on the Israeli foreign exchange market and its immediate impact on the inflationary process on the background of Israel's exchange rate regime The section ends by a discussion of the policy reaction and some short and long term economic consequences. Globalization is an irreversible process. The attempt to close the economy artificially from that process is doomed to failure. The question for economic policy is therefore, how the economy can prepare efficiently to the challenges posed by globalization.
Globalization reduces frictions of international capital movements.
The major challenge is therefore to secure international investors' confidence in the domestic economy. That requires the domestic policy makers' knowledge of the rules governing the conduct of international investment funds. The focus on international investors' behavior derives not only from the size of the current international investment but mainly from the potential future investment and from the access to the domestic and international borrowing market. Globalization therefore greatly intensifies the necessity for economic policy makers to adhere to international standards of sound economic policy making. International rating agencies' sovereign risk ratings have thus greatly gained in importance in recent years.