Yakir Plessner, professor of economics at Hebrew University (Rehovot) and former Deputy Governor of the Bank of Israel, has written the third in the IASPS series of annual reviews of Israeli monetary policy. His review of monetary policy in 1992 covers the performance of financial markets, the banking system, and the success of the Bank of Israel in attempting to control inflation through two instruments of monetary policy, the exchange-rate peg and setting of interest rates.

Plessner cites two positive achievements:

• The indebtedness of the public sector did not increase (but it did not fall either).
• "Free credit," the credit extended at the discretion of the lending bank, rather than on government instructions, increased from 73% of total credit in 1991 to 84.5% in 1992.

These gains, however, were offset by continued fear of inflation. Inflation harms growth because it forces the public to invest time and effort in maintaining the value of financial assets, discourages the inflow of foreign credit, and imposes a risk premium on domestic and foreign investment. The persistent fear of inflation in 1992 was reflected in the following events:

• The value of financial assets--trust funds, provident funds, pension funds, domestic currency free credit--that is indexed to inflation increased in 1992. The business sector issued NIS 314.4 million of bonds indexed to the consumer price index or foreign currency.
• Foreign currency credit declined as a share of total credit.
• The amplitude of interest rate spreads on overdraft accounts was 31.9 percentage points and was an astonishing 105.3 percentage points on dollar loans.
• The Bank of Israel continued to accommodate inflationary pressure by infusing base money into the monetary system. This infusion allowed the public to borrow money from the banks to speculate against the exchange rate. The Government's monetary policy thus contributed to an unplanned devaluation.

Plessner's most important criticism is that the Bank of Israel has never resolved to pursue the anti-inflationary policy of a fixed exchange rate to its conclusion. The losers of devaluations and inflation are the citizens of Israel.