meir sokoler : the time has come for a new bank of israel law lecture by dr meir sokoler, acting governor of the bank of israel, at the scholarships award ceremony at the technion, haifa, 17 march 2005. * * * first, i would like to thank you for inviting me to address such a distinguished gathering in such an eminent institution as the technion. many years ago i was a student of economics here, and i remember the excellent students of this august institute and the wonderful experience of outstanding instruction i received. i am sure that you have all heard of the bank of israel, the country's central bank. it appears, however, that many israelis do not know much about it, apart from the fact that it prints israel's money. a few months ago a 6 - year - old from an israeli primary school wrote to the governor. in the carefully drafted letters of a child who had just learnt how to write, he asked : " mr. governor of the bank of israel, i heard that you in the bank of israel print the country's money. why don't you print more money so that there won't be any more poor people, and there will be more roads and schools? " it might seem natural that such a young child would not know the answer to the question, but it transpires that many citizens, adults as well as children, ask us the same question in one form or another. at first glance the question seems to be justified. you might think that operating the banknote printing machines for a few more hours would solve all the economy's problems. in fact, that is how israel's governments acted until the mid - 1980s. till then the bank of israel printed huge quantities of banknotes for all sorts of purposes, some of them highly commendable. the results, however, were disastrous. the value of the notes at the time eroded rapidly, with catastrophic economic consequences. what led the bank of israel to print so many banknotes at that time? why did it allow such a rapid increase in the money supply and the monetary base? didn't it know that this would create high inflation that would rapidly erode the purchasing power of the currency? it is clear that to the governors of the bank at that time, to the bank's economists, and to many other people the outcome was very obvious. this was something that had been known for hundreds or even

price stability target at the january mpm ( chart 6 ). while details of the discussions at the february and march mpms held in the period after the price stability target was introduced but before the new governor and deputy governors took office are referred to in the minutes, the topic of discussion shifted to specific measures to strengthen monetary easing with the aim of achieving the price stability target of 2 percent. in the discussions, issues were raised regarding purchases of jgbs with longer remaining maturities, and consolidation of purchases of jgbs under the asset purchase program with those conducted in terms of money market operations ( chart 7 ). although the set of decisions made at the mpm held on april 3 and 4 is called a new phase of monetary easing, some of the ideas largely reflect quantitative easing and comprehensive monetary easing, adopted from march 2001 to july 2006 and from october 2010 to march 2013, respectively. for example, the setting of the main operating target for money market operations to the monetary base instead of the uncollateralized overnight call rate is similar to the framework of quantitative easing – in which the main operating target was the bank ’ s current account balances – on the premise that the outstanding balance of banknotes issued does not fluctuate significantly. moreover, most of the financial assets currently being purchased are the same as those purchased during the period of comprehensive monetary easing – such as jgbs, etfs, and japan real estate investment trusts ( j - reits ) ( chart 8 ). the extension of the average remaining maturity of the bank ’ s jgb purchases to around seven years has consequently increased the scale of monetary easing. however, during the last phase of comprehensive monetary easing, the bank had set the amount outstanding of the asset purchase program at around 111 trillion yen by end - 2014. in terms of the monetary base, this would be equivalent to around 200 trillion yen ( although a range should be allowed for this number ). the amount is less than the targeted amount outstanding under qqe, which is 270 trillion yen at end - 2014, but one can argue that the bank had already committed to considerably increasing the size of the monetary base. in this sense, the bank ’ s policies over the years should be understood as being consistent. f. what it means to avoid an incremental approach since late may 2013, expectations for further monetary easing had increased in the market, in a situation where instability had been observed in financial markets at home and abroad. however, q