the exchange rate. in order for a reduction in interest to affect the exchange rate the public must feel that we have abandoned the target of price stability and that the circumstances have been created that prevent us from restoring it in the foreseeable future. that, as you know, has not been the case in the last two and a half years. if a situation is created in which the public is given to understand that steps have been taken to prevent us from being able to maintain price stability, even at the present interest rate there will be a shift in capital flows that will cause more rapid local - currency depreciation. however, a change of this kind in the exchange rate will not bring the benefits those who have been clamoring for it for years expect – a reduction in the interest rate in order to create devaluation – because stimulating economic activity by encouraging exports requires real depreciation, i. e., nominal depreciation without an increase in prices. · the second assessment is that “ currently, the bank of israel is reducing the interest rate because the exchange - rate band exists ” ( interview in yedioth aharonoth, 6. 7. 2001 ). in other words, the reason why the bank of israel reduces the interest rate is to keep the exchange rate away from the lower limit of the band. this view could have a foundation if the reduction of the interest rate did in fact generate devaluation. as you know, this has not been the case in the last two and a half years, when there was a continuous downward trend in the interest rate. consequently, this consideration was never relevant for interest - rate decisions. the fact that the interest rate was reduced, and the extent to which this was done, was determined solely on the basis of inflation expectations and the consideration of matters pertaining to financial stability. if, because of the existence of the exchange - rate band, on the other hand, inflation could accelerate - a reasonable outcome in certain circumstances - the band would oblige us to change the interest - rate policy. there is absolutely no doubt that without the band israel ’ s interest rate could be lower than with it. 4. abolishing the ceiling on treasury bill issues : this limit, like the lower limit of the exchange - rate band, is intended – as various government representatives repeated at the recent caesarea conference – to restrain monetary policy. the story sounds somewhat kafkaesque : on the one hand, you set a target

david klein : the framework of israel's economic policy for 2002 speech by dr david klein, governor of the bank of israel, to the financial forum, tel - aviv, 11 july 2001. * * * every year, in the framework of the budget discussions, the government passes two resolutions regarding macroeconomic policy for the coming year. if we take last year as an example, on 16th august 2000 the government reached a decision ( no. 2182 ) about “ economic policy for 2001budgetary aggregates - fiscal policy. ” this decision, with no preamble, determined : 1. the extent of the budget deficit for 2001 in absolute terms ( nis 8. 2 billion ) and as a share of gdp ( 1. 75 percent ) ; 2. the extent of government expenditure ( nis 194. 2 billion ) ; 3. the extent of the budget deficit for 2003 ( 1. 25 percent of gdp ). the next decision ( no. 2183 ), on the same date, refers to “ economic policy for 2001 - monetary policy. ” the approach to monetary policy differs from that to fiscal policy in two respects : first, the decision regarding monetary policy has a preamble specifying the “ objectives of economic policy for 2001, ” and mentioning three of them : · maximizing the economy ’ s ability to grow on a sustainable basis ; · increasing business - sector employment ; · the inflation targets for 2001, 2002, and 2003, with the one for 2003 ( 1 - 3 percent ) being defined as ‘ price stability, ’ there is no interest - rate target because there are other factors that also affect inflation. hence, no specific interest rate is invariably consistent with the inflation target, and it must therefore change as the circumstances require. it is somewhat odd to regard monetary policy alone as having a role to play in determining growth, employment and price stability targets, keeping fiscal policy detached from them. in the past we proposed that the goals of macroeconomic policy should be presented as relevant also for fiscal policy, and should feature in the preamble to both decisions. second, the two decisions - on fiscal and monetary policy - differ in another respect : the monetary policy decision states that the bank of israel must submit reports on the performance of monetary policy to the government and the public, inter alia explaining deviations from the inflation target and their policy implications. the bank of israel does this in the framework of its semi - annual inflation report. the absence of a parallel reporting