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Iceland: Challenging Times for Monetary and Fiscal Policies

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Author Info
Andrea de Michelis
Abstract

Monetary and fiscal policies face huge challenges: the banking sector has collapsed; the economy is in the midst of a deep recession; the exchange rate has plunged; capital flows have been frozen; inflation is elevated; public debt has risen; source of revenues have disappeared; social needs have increased; and the unemployment insurance fund has been nearly depleted. Against this difficult background, this paper discusses what policy makers should do in order to restore balance in the Icelandic economy and lay out the foundations for a sustainable recovery. The key recommendations are to seek entry in the euro area and implement the fiscal consolidation measures necessary to comply with the IMF programme.

Islande : Une période délicate pour la politique monétaire et budgétaire
La politique monétaire et budgétaire est confrontée à de graves problèmes : le système bancaire s’est effondré ; l’économie traverse une profonde récession ; le taux de change s’est beaucoup déprécié ; les mouvements de capitaux se sont interrompus ; l’inflation est forte ; la dette publique a augmenté ; des sources de recettes ont disparu ; les besoins sociaux se sont accrus ; les ressources du fonds d’assurance chômage sont presque épuisées. Dans ce sombre contexte, cette étude expose ce que les autorités devraient faire pour rétablir l’équilibre de l’économie islandaise et poser les bases d’une reprise durable. Il leur est surtout recommandé de chercher à adhérer à la zone de l’euro et d’appliquer les mesures d’assainissement budgétaire nécessaires pour se conformer au programme du FMI.

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File URL: http://dx.doi.org/10.1787/221000115525
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Paper provided by OECD, Economics Department in its series OECD Economics Department Working Papers with number 726.

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Date of creation: 09 Oct 2009
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Handle: RePEc:oec:ecoaaa:726-en

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Related research
Keywords: capital controls; efficiency of social spending; euro area; European Union; exchange rate targeting; fiscal consolidation; fiscal policy framework; Iceland; inflation expectation; inflation targeting; inflation; optimal currency area; policy credibility; producer support in agriculture; public investment; public-sector wages; student-to-teacher ratio; tax; volatility; anticipation d'inflation; assainissement budgétaire; cadre de la politique budgétaire; ciblage de l’inflation; contrôle des mouvements de capitaux; crédibilité des politiques; efficience des dépenses sociales; impôt; inflation; investissement public; Islande; nombre d’élèves par enseignant; objectif de taux de change; salaires dans le secteur public; soutien aux producteurs dans l’agriculture; Union européenne; volatilité; zone Euro;

Find related papers by JEL classification:
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
H52 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Education
H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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This page was last updated on 2009-11-23.

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