IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/79602.html
   My bibliography  Save this paper

The Icelandic and Irish Banking Crises: Alternative Paths to a Credit-Induced Collapse

Author

Listed:
  • Howden, David

Abstract

Iceland’s and Ireland’s banking crises since 2008 provide good examples of credit-induced collapses. While traditional Austrian Business Cycle Theory emphasizes central bank induced low interest rates as the origin of crisis, this paper focuses on two different instigators using the Icelandic and Irish collapses as narratives. First, the artificial reduction in risk through Iceland’s comprehensive deposit insurance plan fueled the króna carry trade throughout the early 2000s, helping to spur a debt-based expansion. Second, the reduction in risk upon accession to the Eurozone increased foreigners’ willingness to invest in Ireland. Higher Irish inflation rates until normalization with core European countries also created higher risk-adjusted returns for foreigners to invest in Ireland. These two factors compounded the lax monetary policies of the central banks of Iceland and Europe and elevated the propensities to take on risk and debt in both countries, thus instigating Austrian-type business cycles.

Suggested Citation

  • Howden, David, 2013. "The Icelandic and Irish Banking Crises: Alternative Paths to a Credit-Induced Collapse," MPRA Paper 79602, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:79602
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/79602/1/MPRA_paper_79602.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Philip Lane, 2011. "The Irish Crisis," The Institute for International Integration Studies Discussion Paper Series iiisdp356, IIIS.
    2. Patrick Honohan & Philip R. Lane, 2003. "Divergent inflation rates in EMU [‘European financial integration and equity returns: a theory-based assessment’]," Economic Policy, CEPR;CES;MSH, vol. 18(37), pages 357-394.
    3. repec:oup:ecpoli:v:26:y:2011:i:66:p:183-231 is not listed on IDEAS
    4. Fernanda Nechio, 2011. "Monetary policy when one size does not fit all," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue june13.
    5. Benjamin Powell, 2003. "Economic Freedom and Growth: The Case of the Celtic Tiger," Cato Journal, Cato Journal, Cato Institute, vol. 22(3), pages 431-448, Winter.
    6. Morgan Kelly, 2009. "The Irish Credit Bubble," Working Papers 200950, Geary Institute, University College Dublin.
    7. Sigridur Benediktsdottir & Jon Danielsson & Gylfi Zoega, 2011. "Lessons from a collapse of a financial system [Looting: The economic underworld of bankruptcy for profit]," Economic Policy, CEPR;CES;MSH, vol. 26(66), pages 183-235.
    8. Balli, Faruk & Basher, Syed Abul & Ozer-Balli, Hatice, 2010. "From home bias to Euro bias: Disentangling the effects of monetary union on the European financial markets," Journal of Economics and Business, Elsevier, vol. 62(5), pages 347-366, September.
    9. 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.
    10. Philip R. Lane, 2012. "The European Sovereign Debt Crisis," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 49-68, Summer.
    11. Patrick Honohan & Anthony J. Leddin, 2006. "Ireland in EMU - More Shocks, Less Insulation?," The Economic and Social Review, Economic and Social Studies, vol. 37(2), pages 263-294.
    12. Gerdesmeier, Dieter & Roffia, Barbara & Eleftheriou, Maria, 2006. "Monetary policy rules in the pre-EMU era: Is there a common rule?," Working Paper Series 659, European Central Bank.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

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

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Constantin Gurdgiev & Brian M. Lucey & Ciarán Mac an Bhaird & Lorcan Roche-Kelly, 2011. "The Irish Economy: Three Strikes and You’re Out?," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 58(1), pages 19-41, March.
    2. Philip R. Lane, 2019. "Macrofinancial Stability and the Euro," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 67(3), pages 424-442, September.
    3. Gilchrist, Simon & Schoenle, Raphael & Sim, Jae & Zakrajšek, Egon, 2023. "Financial heterogeneity and monetary union," Journal of Monetary Economics, Elsevier, vol. 139(C), pages 21-40.
    4. Michał Brzoza-Brzezina & Pascal Jacquinot & Marcin Kolasa, 2014. "Can We Prevent Boom-Bust Cycles During Euro Area Accession?," Open Economies Review, Springer, vol. 25(1), pages 35-69, February.
    5. Angelini, Elisabetta Croci & Farina, Francesco, 2012. "Current account imbalances and systemic risk within a monetary union," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 647-656.
    6. Christoph Schmidt & Benjamin Weigert, 2013. "Weathering the crisis and beyond: perspectives for the Euro area," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(4), pages 564-595, August.
    7. Gylfi Zoega, 2016. "Responding to Capital Flows in a Very Small Economy," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 44(2), pages 159-170, June.
    8. Marie‐Helene Gagnon & Celine Gimet, 2020. "Unconventional economic policies and sentiment: An international assessment," The World Economy, Wiley Blackwell, vol. 43(6), pages 1544-1591, June.
    9. Arnold, Ivo J.M. & Soederhuizen, Beau, 2016. "Internal or external devaluation? What does the EC Consumer Survey tell us about macroeconomic adjustment in the Euro area?," Journal of International Money and Finance, Elsevier, vol. 64(C), pages 88-103.
    10. Patrick Honohan & Anthony J. Leddin, 2006. "Ireland in EMU - More Shocks, Less Insulation?," The Economic and Social Review, Economic and Social Studies, vol. 37(2), pages 263-294.
    11. Sangyup Choi & Kimoon Jeong & Jiseob Kim, 2023. "One Monetary Policy and Two Bank Lending Standards: A Tale of Two Europes," Working papers 2023rwp-209, Yonsei University, Yonsei Economics Research Institute.
    12. Raza, Hamid & Zoega, Gylfi & Kinsella, Stephen, 2018. "Capital inflows, crisis and recovery in small open economies," Finance Research Letters, Elsevier, vol. 27(C), pages 273-282.
    13. Christoph M. Schmidt & Benjammin Weigert, 2013. "Weathering the Crisis and Beyond: Perspectives for the Euro Area," Ruhr Economic Papers 0409, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    14. Philip Lane, 2013. "Financial Globalisation and the Crisis," Open Economies Review, Springer, vol. 24(3), pages 555-580, July.
    15. Anthony J. Evans, 2011. "The Irish Economic ‘Miracle’: Celtic Tiger or Bengal Kitten?," Chapters, in: David Howden (ed.), Institutions in Crisis, chapter 3, Edward Elgar Publishing.
    16. Frankel, Jeffrey, 2015. "The euro crisis: Where to from here?," Journal of Policy Modeling, Elsevier, vol. 37(3), pages 428-444.
    17. Terzi, Alessio, 2020. "Macroeconomic adjustment in the euro area," European Economic Review, Elsevier, vol. 128(C).
    18. S. Devrim Yilmaz & Burak Saltoglu, 2013. "Why is it so Difficult and Complex to Solve the Euro Problem?," Centre for Growth and Business Cycle Research Discussion Paper Series 180, Economics, The University of Manchester.
    19. Gylfi Zoega, 2019. "Greece and the Western Financial Crisis," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 47(2), pages 113-126, June.
    20. Joseph Byrne & Norbert Fiess, 2010. "Euro area inflation: aggregation bias and convergence," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 146(2), pages 339-357, June.

    More about this item

    Keywords

    subprime crisis; capital controls; Ireland; Iceland; 2008 crisis;
    All these keywords.

    JEL classification:

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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:79602. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.