the main motive force behind it, particularly in the 1990s when we moved from foreignexchange control to free capital flows, from a fixed exchange rate to an exchange rate determined by market forces, and from inflation at a level of 15 percent to 20 percent a year to price stability. for these achievements we owe thanks to the previous governors, professor jacob frenkel and dr david klein. the government operates within a framework of long - term fiscal discipline the purpose of which is to reduce the burden on the economy of debt, taxation and government expenditure. the public in israelhouseholds and the business sector - benefit from complete freedom in regard to foreign currency ; the economy is an open one in the areas of trade and capital movements ; the capital market is developing constantly, and the government has severely curtailed its involvement in it and in the economy in general ; and the bank of israel pursues an independent monetary policy - mainly due to the nonmoney - printing law of 1985 which simply forbade the bank to print money for the government's budgetary requirements. it is important to observe at this early point that the main target of that long - term strategy is the achievement of sustained growth which we all wish for. it is the basis for improved welfare of the whole population and for welfare policy that will deal with its weaker strata. and indeed, israel's economy achieved a growth rate of over 4 percent in 2004, and although the data relating to real activity in 2005 are not unequivocal, it seems to us that growth for the year as a whole will be between 3. 5 percent and 4 percent. employment data so far show an impressive improvement, at least in the first four months of the year. are these accomplishments enough, and can we now take it easy? obviously that is a rhetorical question, the answer to which is a resounding " no! " many important challenges still confront us : the main challenge is to continue to maintain the achievements that have been attained. much work has been put into reaching this situation and much energy invested in it over many years. relinquishing the accomplishments would soon take us back to where we were and make us start the whole procedure over again. that is too dangerous a game to play, and we should not consider playing it. one of the lessons i learned while at the imf was that one can destroy in less than a year an economic achievement for which one worked for more than a decade - a lesson applicable not

new law that we in the bank of israel propose clearly defines the independence required for a central bank, similar to the situation in other developed countries, but it is apparent to us that independence must go hand - in - hand with responsibility. the new law that we propose therefore also incorporates a clear system of decision - making mechanisms, of internal and public controls, and of reports to the government, the knesset and the public. second, on the side of its responsibility, the proposed law clearly defines the bank's objectives : 1 ) maintaining price stability, according to the target set by the government, as the prime target ; 2 ) supporting the government's other economic goals, including growth and employment, without harming price stability and the proper functioning of the financial system. this replaces the vagueness in the current law. the economic literature states that the central bank will not have independence in its objectives, in other words, the law and the government determine the central bank's objectives. third, the proposed law grants the bank full independence to use the instruments needed to achieve its objectives. in the literature this is referred to as instrument independence. fourth, with regard to decision making, two new bodies are proposed - a monetary committee and an administrative council. the monetary committee will make decisions in the field of monetary policy, and will report accordingly to the public. it is proposed that the governor will chair the committee, which will have a majority of members from outside the bank, who will be selected according to their qualifications in the relevant economic area and free of conflict of interests. the administrative council will authorize administrative issues such as the bank's budget and staff salaries, and will report accordingly to the public. in this council too members from outside the bank will constitute the majority ; one of them will be the chairperson ( not the governor, who will be an ordinary member ). the members from outside the bank of israel will be selected according to their qualifications in the business and administrative sphere, and will be free of conflict of interests. fifth, the proposed law defines a system of periodic reports to the government, the knesset and the public - annual, biannual, and quarterly - as well as a special report which the governor will submit if the bank consistently deviates from the price - stability target defined by the government. the question of the law, as i said above, is vital for the bank of israel so that it can operate in the future, in the near future i hope, in a