inflation targets israel ’ s economic integration within the global economy requires inter alia accepting the standard of price stability prevailing in the developed countries, obtained via an independent central bank. this transition also created several difficulties : • • at one time the slogan ‘ inflation isn ’ t everything, ’ meaning that other objectives such as growth and employment also need to be considered, was very popular. the debate was conducted between those who believed that expansionary monetary policy ( i. e., reducing the interest rate ) could stimulate employment and those who thought that the end - result would only be inflation which, if it persisted, would eventually increase unemployment. the discussion of this subject was concluded in the world, and the general consensus comes down to the following two points : – monetary policy has to be geared first of all towards maintaining price stability ; – to the extent that it does not contradict that primary aim, interest - rate policy can also be administered so as to aid the government in attaining other policy objectives. as long as we were endeavoring to reduce the inflation rate - until two years ago - the argument as to whether price stability was at all possible in israel continued. it was claimed that it was not feasible because of structural reasons, defined as ‘ nominal rigidities ’ or a ‘ monopolistic structure. ’ in any case, a low inflation rate was said to be achievable in israel only if it was ‘ latent, ’ in which case it would be bound to re - emerge at the first opportunity. for example, a low inflation rate would be possible only with a large balance - of - payments deficit and ‘ cheap imports flooding the economy ’ - an unsustainable situation. thus, according to this scenario, there would eventually be massive devaluation, followed by accelerated inflation. the inevitable conclusion was that it would be better not to try to eliminate inflation, as it would not last. we appear by now to have acquired sufficient experience to be able to see that this argument was baseless. on the basis of these considerations, until 2000 the government continued to display reluctance to set annual inflation targets ( it deferred determining a target for as long as possible, leaving it to the end of the year, ignoring the logic regarding the lags with which monetary policy takes effect ; from time to time it considered accepting the inevitability of rising inflation ; it refused to set a long - term or final target ). in august 2000 conditions were created in which the government decided

so a possible interest rate hike would represent a return to conventional monetary policy terrain. and it is not so much the timing of the interest rate move that matters as the subsequent interest rate path which the fed follows. what would a return to normal policy rate conditions in the united states mean for the euro area and for germany ’ s banks? since 2013 we have observed that policy divergence between the united states and the euro area has had two knock - on effects. first, the differential between us and euro - area interest rates has widened ; second, the euro exchange rate has dwindled. this trend gained traction early this year when the eurosystem announced the large - scale purchase of government bonds. that increased the spread between us treasuries and german bunds and sent the euro plummeting against the dollar. so german banks need to remember that even if the fed raises its policy rates, the spell of low interest rates in the euro area looks set to continue. remember what i said just a few minutes ago – sitting tight and hoping for the best simply isn ’ t an option. and as far as possible exchange rate volatility is concerned, banks might theoretically be exposed to currency risk. two factors play a role here. the first is banks ’ funding gap in dollars. that gap measures the excess of a bank ’ s us dollar assets over its us dollar liabilities. the bigger this overhang, the more exposed the bank is to exchange rate risk. the second factor is the bis central bankers ’ speeches mismatch between the maturities of assets and liabilities denominated in us dollars. this maturity mismatch measures both exchange rate risk and interest rate risk. at the onset of the global financial crisis in 2008, both the funding gap and the maturity mismatch of german banks were very large indeed. when the forex markets dried up and german banks got cut off from us dollar funding, the central banks had to step in and lend a helping hand. since then, the ecb, to name but one, has been providing swap facilities, but the take - up now is virtually non - existent. german banks have reduced their vulnerability since those days, slashing their funding gap by downsizing their stock of us dollar assets. what remains substantial, though, is the scale of the maturity mismatch of their us dollar investments. however, the actual risk exposure here is relatively small, because german banks these days are much better hedged against currency risk