Abstract
This paper analyzes the monetary history of Israel in the framework of the concepts of fiscal dominance (FD) and monetary dominance (MD), which appeared in the recent macroeconomic models. It is shown that the inflationary period in Israel (1973-85) had distinct features of FD while the periods before and after the foregoing period can be characterized as belonging to a regime of MD. In this analysis we draw a distinction between solvencey of the public sector (which is based on the discounted public debt) and sustainability (which is based on the undiscounted debt). We also extend the concept of the Pigou effect to cover the price shocks that followed balance of payments crises. We claim that in the absence of a nominal anchor (which characterizes FD), these shocks entail increases in the inflation plateau. After the stabilization of 1985 (and especially in the nineties) the economic regime changed to MD, being based on a sustainable path of the public debt and on an inflation target regime.