Transcript Gylfi Zoёga – Slides

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.