. see hiroshi ( 2006 ) for an evaluation of quantitative easing in japan. see caballero, hoshi and kashyap ( 2006 ). • third, one of the expected effects of quantitative easing is a flattening of the yield curve at longer maturity which improves the medium to longer - term financing conditions for the private sector. but what ultimately matters for investment and spending decisions is the real interest rate and hence inflation expectations. strictly speaking, an increase in the money supply should have implications for the expectations of the future price level. but quantitative easing will only affect expected inflation if the increase in the size of the central bank ’ s balance sheet is not only sizeable but also perceived as being permanent. 10 the experience of the bank of japan provides a clear - cut example of a temporary expansion of the monetary base that did not affect private sector inflation expectations. • fourth, it is not clear how it is possible to increase inflation expectations in a significant way while avoiding a rise in the nominal long - term interest rate after some time. setting the real long - term interest rate as the operational target for monetary policy seems to be rather challenging in an environment with developed financial markets. • fifth, if quantitative easing is perceived as being long - lasting then it could also have an expansionary effect by relaxing fiscal constraints. expansionary fiscal policies represent a sound instrument to stimulate aggregate demand during a deflationary period. in this respect, outright purchases of government bonds by the monetary authority could further strengthen fiscal effects i ) by accommodating the supply of governments bonds, ii ) by affecting the long - end of the yield curve – the risk premium – and iii ) by re - anchoring inflation expectations to a positive target. in particular, the transition to a positive inflation regime reduces the burden on the future fiscal budget by guaranteeing its financial sustainability. 11 of course, the relevance of this effect crucially depends on the duration of the quantitative easing policy and on a credible commitment to a well - defined exit strategy. in this respect, the broad effects stemming from the fiscal and monetary policy mix have been quite muted in stimulating the japanese economy. • finally, it should be recognised that a government bond purchasing programme involves the risk of accumulating significant losses for the central bank. government bonds would be purchased at rather high prices. if the easing measure turned out to be a success, the ensuing economic recovery would gradually entail an increase in long - term interest rates ; this would bring down government bond

targets can be met. but if growth is slower, the government will have to decide whether to cut the growth rate of government spending, or rather forgo some of the planned tax rate decreases, or to do some of both. this will be a difficult decision. in making it the government will have to weigh the benefits of maintaining government programs in a variety of areas, including education, against the benefits of cutting taxes. in international comparisons, israel is typically somewhere around 25 – 30 in the country rankings as a place in which to do business. we seem to be unusual in the variance of the rankings of the individual components of the indices : we do well on the ease of financing and the openness of the economy ; we do not well on the complexities of the tax system ; and we do very badly on bureaucracy. i fear also that in years to come we will do much worse on the corruption index. if we are to sustain growth, we need to reduce bureaucracy and fight the corruption that so often accompanies it. these too are not easy tasks, but they are essential for the wellbeing of israeli society. israel ’ s economic record is all the more remarkable for having been achieved despite our not being at peace with all our neighbors. even in the last five years, we have twice fought limited wars against neighbors. this economy, with its dynamism and creativity, could grow much faster if we were to achieve peace with our neighbors – and there are of course much better reasons than economic growth to hope and work for peace with our neighbors. this is an ambitious agenda. if we were to achieve it, we could within one or two decades find ourselves living in one of the most advanced economies in the world. is it possible? yes, entirely. if you wish it, it is no legend – but it will take extremely hard work and determination to turn the wish into reality. thank you.