who still believed in the exchange rate as a nominal anchor : they continued to vigorously oppose each stage of the relaxation of exchange - rate controls. these elements continue to this day to resist the abolition of the exchange - rate band, even though their reasons have changed and it is perfectly clear that it will be impossible to defend it should the need arise. – those who did not like the by - product of the change under which the bank of israel acquired greater independence in managing monetary policy : the tradition in israel is that changes in the exchange rate can be made only with the agreement of the ministry of finance, while changes in the interest rate can be made solely on the basis of the bank of israel ’ s decision. the person who immediately grasped that aspect of the change - although that was not the reason it was introduced - was the minister of finance, yitzhak modai, when the shift was made from a horizontal to a crawling exchange - rate band, in december 1991. – one question still remains open : can the bank of israel ’ s intervention in the foreign - currency market serve, in certain circumstances, objectives that are also important for the central bank? this question can be placed on the agenda once the exchange - rate band has been abolished. in the last three years the bank of israel has refrained from intervening in the foreign - currency market in any way. as long as that policy continues, changes in the bank of israel ’ s foreign - exchange reserves can result primarily from the government ’ s foreign - currency cash flow, because only the government has direct access to the bank of israel for selling and buying foreign currency, and from profits made from investing the reserves. there are small changes from time to time because of shifts in the banks ’ voluntary deposits with the bank of israel. the level of the reserves is not affected, as some still think, by private capital flows and interest - rate differentials. only a few days ago an analyst explained in an interview why “ israel ’ s foreign - currency market is not a classic target for assault by foreign speculators. ” one of the reasons for this, he claimed, was that “ the foreign - currency reserves are very high ” ( ma ’ ariv, 17. 4. 2001 ). since we are not active in the market, there is no relevance in this context to the question of how large our foreign - currency reserves are. b. the second difficulty : managing monetary policy so as to attain price stability in a regime of

a period of prosperity. the result is rising government debt, an increase in the share of debt - servicing costs in the budget, and a heavier tax burden. the conclusion throughout the developed world was that priority has to be given to reducing government debt to a reasonable level by limiting the budget deficit, and to easing the tax burden by cutting government expenditure as a share of gdp. this conclusion has not yet been accepted by everybody in israel, even though the basic approach has been adopted by all governments in the last decade. • second, the way the budget deficit was defined in israel differed from that in the rest of the world, so that our measured deficit was significantly lower than it would have been had the generally - accepted definition been used. this misled many people, including prime ministers and members of the government, made it very difficult to compare the situation in israel with the rest of the world, and also hampered efforts to explain the need to reduce the deficit. the advocates of our own special method of defining the deficit, which is still used, claimed that it is more correct and refused to change it. for years the bank of israel has avoided arguing about which definition is more correct, suggesting that both figures be presented to the government and the public, but so far without any success. the reduction of inflation has served to greatly narrow the gap between the two definitions, but has not eliminated it completely. naturally, it is not difficult, statistically or otherwise, to measure and present the deficit in the same way as is done elsewhere, and it is time we did so. • third, the need to adhere to fiscal discipline over the long run requires a change of approach in setting the order of priorities in allocating government resources. whereas in the past it was possible to solve any problem, whether genuine or imaginary, by increasing expenditure and the government debt, the need to maintain the declining path of government expenditure - albeit not absolutely but as a share of gdp - raises new issues all over the world, for example : – should the social services that the government provides be extended universally or depend on a means test? should the government ’ s plans to reduce poverty make a distinction between people of working age and others? – is there a place for private services alongside the public services in the spheres of education, health, and welfare? – should the government be the sole agent involved in developing and operating the economic infrastructure, or is there room for the activity of private for - profit elements in part of it,