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

2. The Rate of Inflation Date: April 2001 I/Sovereign Advisory/P1801.ppt
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The Rate of Inflation
Date: April 2001

3. Growth Rate of GDP Date: April 2001 I/Sovereign Advisory/P1801.ppt
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Growth Rate of GDP
Date: April 2001

4. Current Account Deficit as a Percent of GDP
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Current Account Deficit as a Percent of GDP
Date: April 2001

5. Planned and Actual Budget Deficit*
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Planned and Actual Budget Deficit*
* Excluding government credit; domestic deficit, total deficit
Date: April 2001

6. Ratio of Government Debt to GDP
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Ratio of Government Debt to GDP
Maastricht Criterion: 60%
Date: April 2001

7. Foreign Exchange Transactions: Capital Versus Trade Flows*
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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

8. Foreign Investment in Israel
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Foreign Investment in Israel
(III)
* nine months to September
Date: April 2001

9. R:\RDM
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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$

10. The Israeli Shekel Exchange Rate vis-à-vis the Basket -
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The Israeli Shekel Exchange Rate vis-à-vis the Basket -
January 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%

11. The Israeli Shekel Exchange Rate vis-à-vis the Basket -
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The Israeli Shekel Exchange Rate vis-à-vis the Basket -
January 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%

12. Israeli Shekel Exchange Rate vis-à-vis the Basket
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Israeli Shekel Exchange Rate vis-à-vis the Basket + 7 % -
6% slope
4% slope 5
2% slope
8% slope
9% slope
Date: April 2001

13. Israeli Shekel Exchange Rate vis-à-vis the Basket
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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

14. Daily Foreign Exchange Trade and the $ Exchange Rate
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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

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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

16. * average inflation expectations of Private Forecasters-
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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

17. Change in the Monthly CPI
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Change in the Monthly CPI
Average 7/97 to 8/98: 0.3%
Average 12/98 to 12/00: 0%
Date: April 2001

18. Change in the Monthly CPI
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Change in the Monthly CPI
Date: April 2001

19. Inflation Targets and Actual Inflation
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Inflation Targets and Actual Inflation
(percent pa., period average)
Inflation Targets
Lower Limit
Upper Limit
Actual inflation*
No target
18.1
8.3
9.7
8.8
9.7
10.7
10.8
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 , and 1999 (with a certain tolerance range +/- 1%) target ranges for other years
Date: April 2001

20. Inflation Rate* and the Inflation Target
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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

21. Bank of Israel Monthly Interest Rate
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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

22. Bank of Israel Interest Rate Inflation Expectations
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The Bank of Israel Monthly Interest Rate and Inflation Expectations
Bank of Israel Interest Rate
percent
Inflation Expectations
Date: April 2001

23. Bank of Israel Interest Rate
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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

24. Direct Investment from Abroad (incl. Government bonds)
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Direct Investment from Abroad (incl. Government bonds)
Date: April 2001

25. Inflation Differential
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Indices of the NIS/$ Depreciation and the CPI Differential with the US - Cumulative since January 1997
Depreciation
Inflation Differential
Date: April 2001

26. Institutional Investor
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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

27. Israel's rating/sample average
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International Credit Rating and Inflation, the case of Israel 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

28. Period of High Inflation
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Period of High Inflation
Date: 07/00

29. Period of Disinflation*
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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

30. Period of Low Inflation
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Period of Low Inflation
* Israel July 99 - June 2000
** Based on expectations
Date: April 2001

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32. I/Sovereign Advisory/P1801.ppt
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ADDITIONAL CHARTS

33. Main Macroeconomic Fundamentals
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Main Macroeconomic Fundamentals
(period average)
11/2000

34. Unemployment - by number of school years
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Unemployment - by number of school years
(percent of labor force)
12/2000

35. The Stability Triangle
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The Stability Triangle

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37. Nominal Exchange Rates to the US$ in the World and in Israel
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Nominal Exchange Rates to the US$ in the World and in Israel
(end of month)
16/03/2001

38. Equity Indices (December 1996 Prices
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Equity Indices (December 1996 Prices
(end of month)
16/03/2001

39. GDP per Capita (US$) 18/03/2001 R:\RDM I/Sovereign Advisory/P1801.ppt
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GDP per Capita (US$)
18/03/2001

40. Distribution of Exports*, by Countries
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Distribution of Exports*, by Countries
20/03/2000

41. Distribution of Industrial Exports*, by Sectors
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Distribution of Industrial Exports*, by Sectors
19/03/2001

42. High Yield Market - Issuance and Spread
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High Yield Market - Issuance and Spread
03/2001
NASDAQ
LTCM
Crisis
Y2K
Korean
Crisis
Russian
Crisis
SOURCE: CREDIT SUISSE - FIRST BOSTON

43. Exports, Imports, Sum of Exports and Imports
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Exports, Imports, Sum of Exports and Imports
GDP percent, 1995 prices
25/03/2001

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