Small open economies in the vast oceanof global high finance

• Main Authors: Bjarni G. Einarsson, Kristófer Gunnlaugsson, Thorvardur Tjörvi Ólafsson, Thórarinn G. Pétursson
• Format: Report
• Language: unknown
• Subjects: Iceland
• Online Access: http://www.cb.is/library/Skraarsafn---EN/Working-Papers/wp.73_161121.pdf

Iceland has a long history of violent cycles of economic exuberance and hardship, of which therecent financial tsunami is only the latest example. We show that this boom-bust pattern isdriven to an important extent by low-frequency co-movement of various financial variables; i.e., acommon “financial cycle”. This cycle is much longer than the typical business cycle, with significantdifferences in economic performance over its different phases. Indeed, almost all of the cycle’s peakscoincide with some type of financial crisis. We find that Iceland is no island in the vast ocean ofglobal high finance, as we uncover strikingly strong spillovers from fluctuations in global financialconditions.