stanley fischer : overview of israel ’ s economy address by professor stanley fischer, governor of the bank of israel, to the knesset finance committee, jerusalem, 30 may 2005. * * * chair of the finance committee m. k. yakov litzman, members of knesset, honored guests. i am very grateful for the invitation i received from the chair to come and speak to you. as governor of the bank of israel, i attach great importance to this dialogue between the bank and the knesset finance committee. in fact, after almost a month in my new role, i am pleased that my first appearance in public since the inauguration ceremony at the president's residence should be before you. i would like to note at the outset that israel's economy has important achievements to its credit, and although there is much still to do, we are already benefiting from the economic infrastructure that has been, and is still being, constructed. israel's economy is currently enjoying the benefits of economic and financial stability. this can be seen in a number of areas : first, inflation in israel has for quite a long time been within the long term price - stability target range set by the government of between 1 percent and 3 percent a year. moreover, inflation expectations and the forecasts by various experts reflect the assessment that looking a year ahead, inflation will remain within the price - stability target range. second, the interest rate is very low, perhaps its lowest level since the establishment of the state. this is all the more notable alongside the reality of long - term price stability. in this context i would like to say to you that the fact that the economy succeeded not only in achieving price stability but in maintaining it along with low interest is an important reflection of the credibility that monetary policy has acquired over time - and it is essential that we maintain this credibility. i would also like to mention that all this occurred against the background of the process that began almost a year ago of the us federal reserve raising the dollar interest rate. this process is expected to persist, but till now it has not affected the financial situation in israel. third, the nis / $ and the nis / currency – basket exchange rates have been very stable, and this has occurred without bank of israel intervention since 1997, but just through market forces. the volatility of the nis exchange - rate against the dollar is lower than that of many other currencies. thus last year, for example, the standard deviation of the ni

to try to bring the rate back gradually within the range, and if possible to the midpoint of the range, with a one year forward horizon. the underlying reason for this approach is to avoid causing inflation volatility by sharp changes in the interest rate. take the following situation as a hypothetical example : the bank of israel is acting to keep inflation in the next twelve months close to the midpoint of the target, i. e., 2 percent a year. but let us say that in the next ten months the rolling twelve - month inflation rate is below the lower limit of the range because of the drop in the index of 1. 5 percent in september and october mentioned above. we may only see the twelve - month retrospective inflation rate within the target when those two months have dropped out of the calculation. we could have acted differently and reduced the interest rate drastically to bring inflation back within the target much more quickly, but then we could have created an unstable process of overshooting in the opposite direction, with inflation exceeding the target. it is therefore not worthwhile reacting to every shock as it occurs, but it is preferable to persist with the policy of gradually reverting to the inflation target within a year. b. the openness of the economy now to my main topic for today, the openness of israel ’ s economy to the global economy. this is an important issue because economic openness is a new reality that affects all of us, but we may not have internalized it in all areas. this conference, and others like it, take pride in the many and important participants from abroad, and this provides one indication of the new reality in which we live. israel was one of the first countries to realize that a small economy cannot grow without being open to and participating in the global economy. as early as the 1960s we set out on the path of liberalization of international trade. but the program of exposing the economy to abroad in the mid - 1980s and the liberalization of the foreign currency market and capital flows initiated by the bank of israel in the 1990s were the most significant aspects of this process. it was not just that they opened the economy to the global economy, but they created a framework for macroeconomic policy that operates according to the norms accepted in the advanced economies, based on budget and inflation targeting. this provides the infrastructure that enables the economy to achieve sustained growth, provided that the policymakers know how to face the challenges that it places before them. this