“Inflation Targeting, Disinflation and Exchange Rate Policy” Presentation by Dr. Jacob A. Frenkel President, Merrill Lynch International Former Governor of the Bank of Israel

The Rate of Inflation Date: April 2001 I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM The Rate of Inflation Date: April 2001

Growth Rate of GDP Date: April 2001 I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM Growth Rate of GDP Date: April 2001

Current Account Deficit as a Percent of GDP I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM Current Account Deficit as a Percent of GDP Date: April 2001

Planned and Actual Budget Deficit* I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM Planned and Actual Budget Deficit* * Excluding government credit; 1992-1996 domestic deficit, 1997-8 total deficit Date: April 2001

Ratio of Government Debt to GDP I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM Ratio of Government Debt to GDP Maastricht Criterion: 60% Date: April 2001

Foreign Exchange Transactions: Capital Versus Trade Flows* I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM Foreign Exchange Transactions: Capital Versus Trade Flows* * The sum above the columns indicates average cumulative change in transactions p.a. ** Including Unilateral transfers Date: April 2001

Foreign Investment in Israel I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM Foreign Investment in Israel 1993 - 2000(III) * nine months to September Date: April 2001

R:\RDM I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM 01/01/2019 The Israeli Shekel Exchange Rate vis-à-vis the Basket and Dollar July 85 - May 98 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0 2.1 III IV I II 10% 3% Shekels 1985 1986 1987 1988 1989 5% 8% basket US$

The Israeli Shekel Exchange Rate vis-à-vis the Basket - R:\RDM I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM 01/01/2019 The Israeli Shekel Exchange Rate vis-à-vis the Basket - January 1989 - March 1992 1.80 1.90 2.00 2.10 2.20 2.30 2.40 2.50 2.60 2.70 2.80 2.90 I II III IV 1989 1990 1991 1992 NIS 3% 5% 6% 10%

The Israeli Shekel Exchange Rate vis-à-vis the Basket - R:\RDM I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM 01/01/2019 The Israeli Shekel Exchange Rate vis-à-vis the Basket - January 1989 - March 1992 1.80 1.90 2.00 2.10 2.20 2.30 2.40 2.50 2.60 2.70 2.80 2.90 I II III IV 1989 1990 1991 1992 NIS 3% 5% 6% 10%

Israeli Shekel Exchange Rate vis-à-vis the Basket R:\RDM I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM 01/01/2019 Israeli Shekel Exchange Rate vis-à-vis the Basket + 7 % - 6% slope 4% slope 5 2% slope 8% slope 9% slope Date: April 2001

Israeli Shekel Exchange Rate vis-à-vis the Basket R:\RDM I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM 01/01/2019 Israeli Shekel Exchange Rate vis-à-vis the Basket slope 6 % 4 + 7 - 2 37.1% -5.4% NIS per unit of basket Date: april 2001

Daily Foreign Exchange Trade and the $ Exchange Rate R:\RDM I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM 01/01/2019 Daily Foreign Exchange Trade and the $ Exchange Rate Daily Foreign Exchange Trade (excl. swaps) and the $ Exchange Rate 4.4 1200 1153 4.37 Average daily volume for: January-September 1998: $470mm October-December 1998: $520mm 4.31 4.31 4.3 1000 4.21 800 4.19 4.2 US$mm 4.19 599 600 559 548 553 NIS / $ 485 4.1 400 4 200 3.9 1/10/98 7/10/98 13/10/98 16/10/98 21/10/98 26/10/98 29/10/98 3/11/98 6/11/98 11/11/98 16/11/98 19/11/98 24/11/98 27/11/98 2/12/98 7/12/98 10/12/98 15/12/98 18/12/98 23/12/98 29/12/98 Date: 07/03/99

R:\RDM I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM 01/01/2019 Trade in Options and Futures as a Share of Total Foreign Exchange Transactions (incl. T.A. stock exchange) 25% 20% Exponential Trend 15% 10% 5% Moving Average 0% 07-94 10-94 01-95 04-95 07-95 10-95 01-96 04-96 07-96 10-96 01-97 04-97 07-97 10-97 01-98 04-98 07-98 10-98 01-99 04-99 07-99 Date: 28/07/99

* average inflation expectations of Private Forecasters- I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM Inflation Expectations of the Capital Market and of Private Forecasters 2.8 2.7 1.5 4.7 0.8 6.2 9.6 1 2 3 4 5 6 7 8 9 10 11 01/97 03/97 05/97 07/97 09/97 11/97 01/98 03/98 05/98 07/98 09/98 11-I.H 12/98 02/99 04/99 06/99 08/99 10/99 12/99 02/00 04/00 06/00 08/00 10/00 12/00 02/01 04/01 percent F. International Discount Hapoalim Capital Market * average inflation expectations of Private Forecasters- 2001:2.1 , 2002 : 2.0

Change in the Monthly CPI R:\RDM I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM 01/01/2019 Change in the Monthly CPI Average 7/97 to 8/98: 0.3% Average 12/98 to 12/00: 0% Date: April 2001

Change in the Monthly CPI R:\RDM I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM 01/01/2019 Change in the Monthly CPI Date: April 2001

Inflation Targets and Actual Inflation R:\RDM I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM 01/01/2019 Inflation Targets and Actual Inflation (percent pa., period average) Inflation Targets Lower Limit Upper Limit Actual inflation* 1986-1991 No target 18.1 1992-1999 8.3 9.7 8.8 1992-1996 9.7 10.7 10.8 1997-1998 7.0 10.0 7.8 1999 4.0 4.0 1.3 2000 3.0 4.0 0.0 * Point-target for the years 1992 - 1994, and 1999 (with a certain tolerance range +/- 1%) target ranges for other years Date: April 2001

Inflation Rate* and the Inflation Target R:\RDM I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM 01/01/2019 Inflation Rate* and the Inflation Target 14.5 10.0 11.0 8.0 7.0 4.0 3.0 3.5 2.5 2.0 1.0 21.6 13.7 0.3 * Previous 12 months Date: April 2001

Bank of Israel Monthly Interest Rate R:\RDM I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM 01/01/2019 Bank of Israel Monthly Interest Rate 7.2 11.5 12.0 13.5 9.5 13.4 12.7 13.9 15.5 17.0 13.7 9.3 6 8 10 12 14 16 18 1996 1997 1998 1999 2000 2001 percent Date: April 2001

Bank of Israel Interest Rate Inflation Expectations R:\RDM I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM 01/01/2019 The Bank of Israel Monthly Interest Rate and Inflation Expectations Bank of Israel Interest Rate percent Inflation Expectations Date: April 2001

Bank of Israel Interest Rate R:\RDM I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM 01/01/2019 The Official Bank of Israel Interest Rate In Nominal and Expected Real Terms Bank of Israel Interest Rate Real Interest Rate Expected real interest rate = Effective Bank of Israel interest rate adjusted for inflation expectations Date: April 2001

Direct Investment from Abroad (incl. Government bonds) R:\RDM I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM 01/01/2019 Direct Investment from Abroad (incl. Government bonds) Date: April 2001

Inflation Differential R:\RDM I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM 01/01/2019 Indices of the NIS/$ Depreciation and the CPI Differential with the US - Cumulative since January 1997 Depreciation Inflation Differential Date: April 2001

Institutional Investor R:\RDM I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM 01/01/2019 Israel’s International Credit-rating according to Major Rating Agencies & the Creditworthiness-survey of the “Institutional Investor” Moody’s A2 A- A3 BBB+ BBB BBB- Institutional Investor S&P Date: April 2001

Israel's rating/sample average R:\RDM I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM 01/01/2019 International Credit Rating and Inflation, the case of Israel - 1986 to 1999 0.7 0.8 0.9 1 1.1 1.2 1.3 1.4 1.5 1.6 6 11 16 21 Inflation Israel's rating/sample average 1989 1995 1986 1996 1994 1992 1993 1987 1988 1991 1990 1997 1998 1999 Source: Institutional Investor, semi-annual survey.Increase = improvement relative to sample (about 100 countries) Date: 01/00

Period of High Inflation R:\RDM I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM 01/01/2019 Period of High Inflation Date: 07/00

Period of Disinflation* R:\RDM I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM 01/01/2019 Period of Disinflation* 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 1.00 3.00 5.00 7.00 9.00 Real Interest Rate Inflation New-Zealand USA Italy Sweden Spain Ireland UK Finland Norway France Canada Israel Average Israel** * Average disinflation period is about 4 years; In Israel 12/94-6/99 ** based on expectations Date: 07/00

Period of Low Inflation R:\RDM I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM 01/01/2019 Period of Low Inflation * Israel July 99 - June 2000 ** Based on expectations Date: April 2001

1/1/2019 6:35 AM I/Sovereign Advisory/P1801.ppt

I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM ADDITIONAL CHARTS

Main Macroeconomic Fundamentals I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM Main Macroeconomic Fundamentals (period average) 11/2000

Unemployment - by number of school years I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM Unemployment - by number of school years (percent of labor force) 12/2000

The Stability Triangle I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM The Stability Triangle

1/1/2019 6:35 AM I/Sovereign Advisory/P1801.ppt

Nominal Exchange Rates to the US$ in the World and in Israel I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM Nominal Exchange Rates to the US$ in the World and in Israel (end of month) 16/03/2001

Equity Indices (December 1996 Prices I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM Equity Indices (December 1996 Prices (end of month) 16/03/2001

GDP per Capita (US$) 18/03/2001 R:\RDM I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM 01/01/2019 GDP per Capita (US$) 18/03/2001

Distribution of Exports*, by Countries I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM Distribution of Exports*, by Countries 20/03/2000

Distribution of Industrial Exports*, by Sectors I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM Distribution of Industrial Exports*, by Sectors 19/03/2001

High Yield Market - Issuance and Spread I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM High Yield Market - Issuance and Spread 03/2001 NASDAQ LTCM Crisis Y2K Korean Crisis Russian Crisis SOURCE: CREDIT SUISSE - FIRST BOSTON

Exports, Imports, Sum of Exports and Imports R:\RDM I/Sovereign Advisory/P1801.ppt 1/1/2019 6:35 AM 01/01/2019 Exports, Imports, Sum of Exports and Imports GDP percent, 1995 prices 25/03/2001

1/1/2019 6:35 AM I/Sovereign Advisory/P1801.ppt