17. After 100 Years of Experimenting: One Solution?

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.