ISRAEL'S MONETARY POLICY UNDER MARTIAL LAW

Abstract

Introduction. The recent escalation of the conflict in the Middle East has led to increased inflation and currency risks, rising unemployment and a drop in GDP. Significant uncertainty about the expected severity and duration of the war has had a significant impact on business economic activity. The central bank of Israel has taken a number of economic measures to cope with the wartime challenges. These include supporting the shekel, reducing the key interest rate, intensifying long-term development loan programs for households and businesses, maintaining price stability and supporting economic growth. Problem Statement. The implementation of Israel's monetary policy under martial law gives rise to scientific discussions on whether to adhere to an expansionary or restrictive monetary policy regime in times of monetary shocks in order to achieve price and financial stability, as well as to create preconditions for sustainable economic growth. The purpose is to examine time horizons of Israel's monetary cycles from 1991 to 2024 using the tools of the key policy rate, to eliminate the gap between the achieved and planned inflation rate and to create conditions for sustainable economic growth. Methods. The study used general scientific and specific methods of scientific knowledge. In particular, the method of historical analysis, abstract and logical, statistical and economic methods. Results. The study identifies eight periods of monetary shocks in Israel: October 1991; September 1994; May 1996; November 1998; June 2002; June 2006; September 2008; April 2022. To determine the date of the monetary shock, the author focuses on the main tool of the Bank of Israel - the key policy rate. In the early stages of monetary cycles, the Central Bank of Israel tried to curb inflation and support the recovery of investment. Over the long-term monetary policy horizon, the central bank focused its efforts on gradually reducing the key policy rate and anchoring inflation expectations to continue to reduce inflation and achieve price stability typical of developed countries. Despite the presence of uncertainty in Israel's military economy, the risk premium in the economy is still high, despite some recent declines. The cautious monetary policy pursued by the Central Bank of Israel prevents significant fluctuations in financial markets, especially in terms of the exchange rate and capital flows, which ultimately has a positive impact on strengthening international investors' confidence in Israel's economic stability under martial law. Israel's small and open economy is also affected by the global environment. Conclusions. The National Bank of Ukraine should study the experience of the central bank of Israel in responding to wartime challenges to price and financial stability. Raising the key policy rate during wartime is not a priority for Israel's monetary policy to mitigate inflationary risks. The latter are largely absorbed by a decline in aggregate demand from households and businesses. The central bank's foreign exchange reserves and external assistance from international partners are used as a priority to mitigate currency risks in a war economy. The real economy is being supported through large-scale loan programs to compensate businesses for lost revenues. The top priority of supporting Israel's war economy is to maintain jobs and aggregate demand at a level that is capable of achieving the planned economic growth indicators. At the same time, achieving the inflation target within the planned one remains an important condition for achieving macroeconomic stability.