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Iceland: Challenging Times for Monetary and Fiscal Policies

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  • 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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Bibliographic Info

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

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Cited by:
  1. David Carey, 2009. "Iceland: The Financial and Economic Crisis," OECD Economics Department Working Papers 725, OECD Publishing.

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