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Hagkerfi bíður skipbrot: Reynsla Íslendinga af sjálfstæðri peningamálastefnu Alþjóðamálastofnun 26. febrúar Gylfi Zoega Crises • Currency crisis • Financial crisis – Banking crisis – 30-60% of non-financial firms technically bankrupt • Inflation and rising unemployment • Political crisis – Government lacked trust domestically – Unresolved disputes with European countries • A deep recession (10% fall in GDP) and lower living standards • Uncertainty about future directions Savings and investment Debt Credit expansion The mother of all bubbles Monetary policy Labour market No more floating! Problem with a system of floating exchange rates with capital mobility – Transmission channel through exchange rates, affects mainly import prices – A system of CPI indexed loans with fixed exchange rates prevents the interest rate from affecting housing investment – Central Bank of Iceland lacks credibility! – Businesses borrow in foreign currencies, so central bank interest rates have limited effects on their investment activities. – Carry trade No more floating! – Vicious circle: • High domestic interest rates induce firms to borrow in foreign currencies • Business debt in foreign currencies makes the central bank reluctant to lower interest rates, firms can expect high interest rates and high exchange rates. • Businesses borrow even more in foreign currencies. • Monetary policy becomes primarily focused on firms’ balance sheets, any exchange rate depreciation will make firms and industries bankrupt. • Active monetary policy has increased the chances of a financial crises. Lessons and responses • EEA treaty imperfect – Big firms and banks and weak local institutions (CB, FSA, Treasury, politics, media, ….) – Independent currency in a small state incompatible with free capital mobility in the long run, “fair weather phenomenon” – Responses: • Floating rates with capital controls • Currency board outside EU • Apply to the European Union and aim at satisfying Maastricht criteria Options Floating rates with capital controls – Relive the past; problems include rationing of capital, corruption, inefficient allocation of capital between industries and firms Currency board outside EU – Possible on the road to Maastricht, but currently domestic institutions lack credibility and the country also lacks foreign currency reserves. Possible long-term solution outside the EU. Apply to the European Union and aim at satisfying Maastricht criteria – Apply this spring or summer, affect expectations, make the current float easier, and aim at having fixed exchange rates in the future.