it is clear that that government decision proved to be a very wise one. the independence of central banks is vital for their success in carrying out their functions and achieving their goals. why is that? the answer is that democracies have an inflationary bias. there are two reasons for this : the first is that an expansionary interest rate policy, i. e., a reduction in the interest rate, tends to have a positive effect, mainly on gdp, and only later does it lead to inflation, and since governments in democracies generally have a short - term horizon, this leads to a preference for interest rate reductions. this tendency is most marked in the approach to elections. an independent central bank can make decisions with a view to the long term, and can ignore political pressures. the second reason is that the central bank can finance government activity by printing money, which results in inflation. it is very easy / convenient for the government to request financing from the central bank, instead of imposing taxes or trying to raise money by issuing bonds on the financial markets. in the well - known words of keynes in the period of hyperinflation in europe after world war i : “ a government can live for a long time, even the german government or the russian government, by printing paper money … a government can live by this means when it can live by no other. it is the form of taxation which the public finds it hardest to evade and even the weakest government can enforce. ” this situation was a familiar one in israel in the early 1980s, until an end was put to it in 1985, when as part of the economic stabilization program the law known as the “ no printing law ” was passed. this law prohibited the central bank from providing loans to the government, and in practice was the first step towards the independence of the bank of israel. unfortunately, no progress was made since then with regard to the bank ’ s independence. this did not happen only in israel. throughout the world, in the course of the last 25 years central banks have been granted independence. why did governments give independence to their central banks and relinquish the ability to obtain finance from them and to influence their interest rate policy? a. governments understood that without giving their central banks independence, they would probably find themselves in situations of high inflation, as happened in the 1970s and 1980s. b. they also realized that the economy performs better with an independent central bank. c. a by - product of

the public, in line with the practice in the leading central banks. this is part of the gamut of the areas of the bank ’ s responsibilities that includes the monetary committee, the administrative council, and the governor. in its reports the bank will explain the considerations underlying its decisions, including the relevant information available at the time, economic forecasts, and how it views expected economic developments. the reports will include inflation reports and periodic reports, minutes of the discussions of the monetary committee, press releases, etc. the bank of israel, even prior to the enactment of the new law, already publishes an extensive range of reports as per the list above. the issue of new and modern legislation for the bank of israel has been on the public agenda since the beginning of the 1990s. at the end of 1998 the public committee headed by the late judge dov levin – whose members, including professor alex cukierman and professor haim ben - shahar, were experts on the subject – submitted very precise proposals. the proposals were made following an extensive professional review based inter alia on developments in this field throughout the world, particularly in the advanced economies. in addition, after i took office as governor of the bank, the government made a decision adopting the principles that would be incorporated in the new bank of israel law, and this in the spirit of the recommendations of the levin committee and developments in this area around the world. all that remains now is to complete the legislative process as quickly as possible.