Abstract
Asgeir Jonsson surmises the lessons from Iceland’s monetary history since sovereignty in 1918, during which time experiments have been made with various arrangements. His main conclusions are that it is not the choice of an exchange rate regime itself that is most important, but to follow the ground rules required by each framework. There is nothing to indicate that inflation targeting cannot work successfully in Iceland, as it has in other Nordic countries, if a reasonable societal consensus can be reached on the ground rules. The balance of payments has played a key role for economic stability in Iceland, and independent monetary policy is not truly an option unless it is possible to manage the capital account, directly or indirectly, irrespective of the exchange rate regime in place. This has traditionally been accomplished with capital controls, but at a great social cost. The appropriate application of macroprudential tools should offer a new ray of hope for the second century of monetary policy in Iceland.
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Notes
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This lecture was later published as a chapter entitled Í ljósi reynslunnar [In View of Experience] in a compendium of Jónas’ work entitled Velferðaríki á villigötum [A Welfare State on the Wrong Path]. Jónas H. Haralz. (1981). Velferðarríki á villigötum: úrval greina frá áttunda áratugnum [A Welfare State on the Wrong Path: A Selection of Papers from the 1970s]. Reykjavík: Félag frjálshyggjumanna.
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Fluctuating exchange rates cannot insulate economies from the global financial cycle, when capital is mobile. The “trilemma” morphs into a “dilemma”—independent monetary policies are possible if and only if the capital account is managed, directly or indirectly, regardless of the exchange‐rate regime. Hélène Rey. (2018). Dilemma Not Trilemma: The Global Financial Cycle and Monetary Policy Independence. Accessed at http://www.nber.org/papers/w21162.
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Nout Wellink, Lars Svensson, Marvin Goodfriend, Stephen Roach, Claudio Borio, Charles Goodhart, and Lex Hoogduin. Workshop Towards a New Framework for Monetary Policy? Lessons from the Crisis. De Nederlandsche Bank. Accessed at https://www.dnb.nl/en/interest-rates-and-inflation/monetary-policy/workshop-on-otowards-a-new-framework-for-monetary-policy-lessons-from-the-crisis/index.jsp.
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“One question is whether financial stability belongs in the loss function for the central bank, together with inflation and resource utilization. I argued that a good way of handling this additional objective is as a constraint on monetary policy rather than as a separate target variable that appears in the loss function”. Lars E.O. Svensson. (2009). Flexible Inflation Targeting: Lessons from the Financial Crisis. Sveriges Riksbank. Accessed at http://archive.riksbank.se/Upload/Dokument_riksbank/Kat_publicerat/Tal/2009/090921e.pdf.
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Cecilia Skingsley. (2016). Objective-Setting and Communication of Macroprudential Policies. Bank for International Settlements. Accessed at https://www.bis.org/publ/cgfs57.pdf.
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Avinash D. Persaud. (2009). The Role of Policy and Banking Supervision in the Light of the Credit Crisis. Accessed at https://academiccommons.columbia.edu/catalog/ac:130761; and Frank Smets. (2014). Financial Stability and Monetary Policy: How Closely Interlinked? European Central Bank. Accessed at http://www.ijcb.org/journal/ijcb14q2a11.htm.
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Philip Turner. (2017). Did Central Banks Cause the Last Financial Crisis? Will They Cause the Next? Institute of Economic and Social Research. Accessed at https://www.niesr.ac.uk/publications/did-central-banks-cause-last-financial-crisis-will-they-cause-next.
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Hélène Rey. (2018). Dilemma Not Trilemma: The Global Financial Cycle and Monetary Policy Independence. Accessed at http://www.nber.org/papers/w21162.
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Asgeir Jonsson and Hersir Sigurgeirsson. (2014). Áhættudreifing eða einangrun? Um tengsl lífeyrissparnaðar, greiðslujafnaðar og erlendra fjárfestinga [Diversification of Risk or Isolation? The Relationship Between Pension Savings, the Balance of Payments and Foreign Investment]. Accessed at http://audfraedi.is/utgefin-rit/frett/2015/04/27/Ahaettudreifing/, or Fridrik Már Baldursson and Richard Portes (2018). “Restoring Trust in Iceland: Iceland’s IMF Programme,” in Thröstur Olaf SigurJonsson, Murray Bryant, and David Schwarzkopf (eds.), The Return of Trust? Institutions and the Public After the Icelandic Financial Crisis (Emerald Publishing), pp. 111–127.
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Central Bank of Iceland. (2012). Special Publication no. 7: Iceland’s Currency and Exchange Rate Policy Options. Accessed at https://www.sedlabanki.is/utgefid-efni/rit-og-skyrslur/rit/2012/09/17/Serrit-7-Valkostir-Islands-i-gjaldmidils-og-gengismalum/.
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See the paper by Central Bank Chief Economist Thorarinn G. Petursson: Central Bank: Working Paper no. 77: Disinflation and Improved Anchoring of Long-Term Inflation Expectations: The Icelandic Experience. Accessed at https://www.cb.is/publications/publications/publication/2018/03/09/Working-Paper-no.-77-Disinflation-and-improved-anchoring-of-long-term-inflation-expectations-The-Icelandic-experience/.
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Jonsson, A. (2019). After 100 Years of Experimenting: One Solution?. In: Aliber, R., Zoega, G. (eds) The 2008 Global Financial Crisis in Retrospect. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-12395-6_17
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