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Optimal Exchange Rate Policy: The Case of Iceland

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  • Már Guðmundsson
  • Thórarinn G. Pétursson
  • Arnór Sighvatsson
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    Abstract

    This paper analysis the appropriate exchange rate arrangement for Iceland, given its structural characteristics, on the one hand, and the need for a credible nominal anchor for monetary policy, on the other. It also discusses the current regime of a currency peg, its rationale, its success in terms of achieving its goals, and how the apparent conflict between the exchange rate arrangement suggested by the structural characteristics of the economy and the arrangement actually chosen, has been resolved. Finally, the paper provides an assessment of alternative future exchange rate regimes.

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    Bibliographic Info

    Paper provided by Department of Economics, Central bank of Iceland in its series Economics with number wp08.

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    Date of creation: May 2000
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    Handle: RePEc:ice:wpaper:wp08

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    1. Warne, A., 1993. "A Common Trends Model: Identification, Estimation and Inference," Papers, Stockholm - International Economic Studies 555, Stockholm - International Economic Studies.
    2. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbance," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 497, Massachusetts Institute of Technology (MIT), Department of Economics.
    3. Eichengreen, Barry, 1999. "Kicking the Habit: Moving from Pegged Rates to Greater Exchange Rate Flexibility," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 109(454), pages C1-14, March.
    4. Gavosto, Andrea & Pellegrini, Guido, 1999. "Demand and supply shocks in Italy:: An application to industrial output," European Economic Review, Elsevier, Elsevier, vol. 43(9), pages 1679-1703, October.
    5. Neumeyer, P.A., 1995. "Currencies and the Allocation of Risk: The Welfare Effect of a Monetary Union," DELTA Working Papers, DELTA (Ecole normale supérieure) 95-27, DELTA (Ecole normale supérieure).
    6. Mellander, Erik & Vredin, A & Warne, A, 1992. "Stochastic Trends and Economic Fluctuations in a Small Open Economy," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 7(4), pages 369-94, Oct.-Dec..
    7. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, Elsevier, vol. 43(3), pages 607-654, June.
    8. Frederic S. Mishkin, 2000. "International Experiences with Different Monetary Policy Regimes," NBER Working Papers 7044, National Bureau of Economic Research, Inc.
    9. Williamson, John, 1998. "Crawling Bands or Monitoring Bands: How to Manage Exchange Rates in a World of Capital Mobility," International Finance, Wiley Blackwell, Wiley Blackwell, vol. 1(1), pages 59-79, October.
    10. Bergman, U Michael, 1999. " Do Monetary Unions Make Economic Sense? Evidence from the Scandinavian Currency Union, 1873-1913," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 101(3), pages 363-77, September.
    11. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    12. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198284345, October.
    13. Andrew Atkeson & Tamim Bayoumi, 1993. "Do private capital markets insure regional risk? Evidence from the United States and Europe," Open Economies Review, Springer, Springer, vol. 4(3), pages 303-324, September.
    14. George Tavlas, 1994. "The theory of monetary integration," Open Economies Review, Springer, Springer, vol. 5(2), pages 211-230, March.
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    Cited by:
    1. Ágeir Daníelsson & Lúdvík Elíasson & Magnús F. Gudmundsson & Björn A. Hauksson & Ragnhildur Jónsdóttir & Thorvardur Tjörvi Ólafsson & Thórarinn G. Pétursson, 2006. "QMM A Quarterly Macroeconomic Model of the Icelandic Economy," Economics, Department of Economics, Central bank of Iceland wp32, Department of Economics, Central bank of Iceland.

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