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Lessons for Iceland from the Monetary Policy of Sweden

Andersson, Fredrik N G LU and Jonung, Lars LU (2018) In Working Papers
Abstract
The purpose of this report is to derive lessons from inflation targeting in Sweden for the choice of the future monetary policy regime of Iceland. Swedish inflation targeting has been a success in terms of reducing inflation and inflation volatility, but real economic volatility is not lower compared to previous periods. In addition, financial imbalances have grown rapidly. A key lesson is that the Riksbank has closely shadowed the policy of the European Central Bank due to financial integration. In other words, the Riksbank has behaved as if Sweden had a fixed exchange rate to the euro. Our analysis clearly indicates that a small economy cannot pursue an independent monetary policy from the rest of the world in a financially integrated... (More)
The purpose of this report is to derive lessons from inflation targeting in Sweden for the choice of the future monetary policy regime of Iceland. Swedish inflation targeting has been a success in terms of reducing inflation and inflation volatility, but real economic volatility is not lower compared to previous periods. In addition, financial imbalances have grown rapidly. A key lesson is that the Riksbank has closely shadowed the policy of the European Central Bank due to financial integration. In other words, the Riksbank has behaved as if Sweden had a fixed exchange rate to the euro. Our analysis clearly indicates that a small economy cannot pursue an independent monetary policy from the rest of the world in a financially integrated world. Consequently, we suggest a fixed exchange rate arrangement for Iceland, preferably through a currency board. A currency board would provide exchange rate and price stability. A currency board would require domestic reforms to enhance price and wage flexibility as well as proper regulations on the financial system to minimize the risk of future banking crises. (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Working Paper
publication status
published
subject
keywords
monetary policy, inflation targeting, financial stability, Riksbank, Sweden, Iceland, Central Bank of Iceland, E42, E43, E44, E47, E52, E58, E62
in
Working Papers
issue
2018:16
pages
66 pages
language
English
LU publication?
yes
id
8d227bb6-c20b-4b66-9d22-2dd012b58466
alternative location
https://swopec.hhs.se/lunewp/abs/lunewp2018_016.htm
date added to LUP
2018-06-19 11:12:26
date last changed
2018-11-21 21:40:27
@misc{8d227bb6-c20b-4b66-9d22-2dd012b58466,
  abstract     = {The purpose of this report is to derive lessons from inflation targeting in Sweden for the choice of the future monetary policy regime of Iceland. Swedish inflation targeting has been a success in terms of reducing inflation and inflation volatility, but real economic volatility is not lower compared to previous periods. In addition, financial imbalances have grown rapidly. A key lesson is that the Riksbank has closely shadowed the policy of the European Central Bank due to financial integration. In other words, the Riksbank has behaved as if Sweden had a fixed exchange rate to the euro. Our analysis clearly indicates that a small economy cannot pursue an independent monetary policy from the rest of the world in a financially integrated world. Consequently, we suggest a fixed exchange rate arrangement for Iceland, preferably through a currency board. A currency board would provide exchange rate and price stability. A currency board would require domestic reforms to enhance price and wage flexibility as well as proper regulations on the financial system to minimize the risk of future banking crises. },
  author       = {Andersson, Fredrik N G and Jonung, Lars},
  keyword      = {monetary policy,inflation targeting,financial stability,Riksbank,Sweden,Iceland,Central Bank of Iceland,E42,E43,E44,E47,E52,E58,E62},
  language     = {eng},
  note         = {Working Paper},
  number       = {2018:16},
  pages        = {66},
  series       = {Working Papers},
  title        = {Lessons for Iceland from the Monetary Policy of Sweden},
  year         = {2018},
}