Prospects for a Currency Board in Iceland

• Main Author: Mabie, Alexander
• Format: Report
• Language: unknown
• Subjects: Iceland
• Online Access: https://sites.krieger.jhu.edu/iae/files/2017/04/Alexander_Mabie_Iceland.pdf

In October 2008, Iceland suffered the biggest banking crisis in history relative to the size of an economy. Its three main banks, Glitnir, Kaupthing, and Landsbanki, were not able to avoid the deterioration in global financial markets following the September collapse of Lehman Brothers. Ever since, many economists have questioned whether a floating currency issued by the Central Bank of Iceland (CBI) is the most suitable monetary system for the Nordic island, or if it is time for Iceland to abandon the kroná (ISK) and adopt a new monetary regime. This paper examines the prospects of introducing several alternative monetary regimes in Iceland, namely a currency board system. In doing so, it presents a comparison of each regime’s past performance in Iceland (if applicable) and elsewhere as well as each regime’s potential effects on exchange rate dynamics. Lastly, it explores what might constitute an exchange rate that would be sustainable for a currency board. Iceland; financial crisis; currency board; dollarization; nominal GDP targeting