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The Rise and Fall of the Icelandic Economy

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  • Howden, David

Abstract

Iceland became the first developed country in 30 years to request help from the IMF in 2009. While the depths of its recent recession are well studied, the causes of its origin are still misunderstood. This paper looks at two factors: (1) the blanket guarantees provided to the Icelandic banking system by various public agencies, and which fostered an environment of excessive risk taking; (2) a faulty inflation-targeting framework by the Central Bank of Iceland, which resulted in a credit binge engulfing the small island. While the first factor explains why Iceland´s banking sector grew as large as it did, the second accounts for the magnitude of the imbalances in both the real and financial sectors.

Suggested Citation

  • Howden, David, 2013. "The Rise and Fall of the Icelandic Economy," MPRA Paper 79603, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:79603
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    References listed on IDEAS

    as
    1. David Howden, 2010. "Knowledge shifts and the business cycle: When boom turns to bust," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 23(2), pages 165-182, June.
    2. Rajkamal Iyer & Manju Puri & Nicholas Ryan, 2013. "Do Depositors Monitor Banks?," NBER Working Papers 19050, National Bureau of Economic Research, Inc.
    3. David G. Mayes, 2009. "Did Recent Experience of a Financial Crisis Help in Coping with the Current Financial Turmoil? The Case of the Nordic Countries," Journal of Common Market Studies, Wiley Blackwell, vol. 47(5), pages 997-1015, November.
    4. Altig,David E. & Smith,Bruce D. (ed.), 2003. "Evolution and Procedures in Central Banking," Cambridge Books, Cambridge University Press, number 9780521814270.
    5. Thorolfur Matthiasson, 2008. "Spinning out of control, Iceland in crisis," Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 34, pages 1-3.
    6. Thórarinn G. Pétursson, 2002. "Wage and price formation in a small open Economy: Evidence from Iceland," Economics wp16_thorarinn, Department of Economics, Central bank of Iceland.
    7. Roger W. Garrison, 2004. "Overconsumption and Forced Saving in the Mises-Hayek Theory of the Business Cycle," History of Political Economy, Duke University Press, vol. 36(2), pages 323-349, Summer.
    8. David Howden, 2013. "Separating the Wheat from the Chaff: Icelandic and Irish Policy Responses to the Banking Crisis," Economic Affairs, Wiley Blackwell, vol. 33(3), pages 348-360, October.
    9. Philipp Bagus & David Howden, 2012. "Still unanswered quibbles with fractional reserve free banking," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 25(2), pages 159-171, June.
    10. David G. Mayes, 2009. "Did Recent Experience of a Financial Crisis Help in Coping with the Current Financial Turmoil? The Case of the Nordic Countries," Journal of Common Market Studies, Wiley Blackwell, vol. 47(5), pages 997-1015, November.
    11. Bagus, Philipp & Howden, David, 2010. "The Term Structure of Savings, the Yield Curve, and Maturity Mismatching," MPRA Paper 79592, University Library of Munich, Germany.
    12. Ms. Keiko Honjo & Mr. Benjamin L Hunt, 2006. "Stabilizing Inflation in Iceland," IMF Working Papers 2006/262, International Monetary Fund.
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    Cited by:

    1. Bagus, Philipp & Howden, David, 2014. "Central Bank Insolvency: Causes, Effects and Remedies," MPRA Paper 79605, University Library of Munich, Germany.
    2. Bagus, Philipp & Howden, David, 2014. "Fiscal Considerations of Central Bank Recapitalization," MPRA Paper 79606, University Library of Munich, Germany.

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    More about this item

    Keywords

    Iceland; subprime crisis; 2008 crisis;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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