DP4906 | Legal, Actual and Desirable Independence: A Case Study of the Bank of Israel

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23/02/2005

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Abstract

This paper documents the evolution of the legal independence of the Bank of Israel since its creation in 1954 to present times, provides an international comparison, and assesses the changes in the actual independence of the Bank on a yearly basis following the 1985 stabilization of inflation. The data developed in the paper makes it possible to compare the evolution of actual and of legal independence after the 1985 stabilization and to compare the legal independence of the bank with that of other countries at different points in time. The paper also evaluates the level of legal independence embedded in the Levin?s committee recommendations for reform of the Bank of Israel law. The paper shows that various institutional changes have induced, since 1985, substantial changes in the actual independence of the bank without any legislative change. The paper also identifies domestic and international factors that stimulated those changes and evaluates the desirable level of independence for the future. In particular the paper evaluates the pros and the cons of assigning to the bank growth targets, in addition to inflation targets.