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

stanley fischer : impact of the global financial crisis on israel ’ s economy address by professor stanley fischer, governor of the bank of israel, to the general assembly of the association of publicly traded companies, jerusalem, 8 december 2008. * * * for more than a year the world has been confronting one of the worst financial crises in over seventy years. this crisis has two phases : the first, financial, and the second, real, in other words a significant slowdown, and possibly even a global recession. both the financial and real effects of the global financial crisis on israel's economy are clearly evident. i would like to stress, however, that israel entered this period in a more favorable state than that in most other countries. on the financial side the crisis is reflected in israel mainly by the fall in prices of shares and corporate bonds, unlike in the advanced and other economies. in addition, the rate of growth declined to 2. 3 percent ( annual rate ) in the third quarter, and it is expected that the slowdown in israel's growth rate will continue, i. e., growth will remain positive, but will slow further, ( to 1. 5 percent in 2009 ), as opposed to a more significant slowdown, or even a recession, in the advanced economies. israel's relatively favorable situation is due to several factors : 1 ) the government's fiscal policy in the last few years was a responsible one. 2 ) the bank of israel ’ s interest rate policy supported financial stability and the ability of the economy to deal successfully with the effects of the slowdown in growth. this, without acting counter to the return of inflation to within the target range. 3 ) a surplus has been created in the current account of the balance of payments. 4 ) israel's foreign exchange reserves are high and rising, as a result of the bank of israel's plan to increase them. 5 ) the levels of growth and employment were high at the onset of the crisis. 6 ) israel's banking system is strong and stable compared with those of the advanced economies. 7 ) israel's capital market did not develop advanced, complex financial instruments whose inherent risk levels are difficult to assess. 8 ) the average debt burden of companies and households is relatively low. the challenge at present is to preserve the economy's relatively favorable position, to take advantage of it to deal with the new situation, and to introduce the measures needed to escape from the period of slowdown without harm