Economic Affairs

January 2014
Lúðvík Elíasson

The Central Bank has now published Economic Affairs no. 6: “Indexation 101”, by Lúdvík Elíasson. The paper discusses various aspects of price indexation of financial obligations and focuses on a number of points related to the application and impact of indexation.  The discussion is based on decades of experience of price indexation, both in Iceland and in other countries, and on extensive scholarly research on the effects of indexation.

February 2011
Arnór Sighvatsson, Ásgeir Daníelsson, Daníel Svavarsson, Freyr Hermannsson, Gunnar Gunnarsson, Hrönn Helgadóttir, Regína Bjarnadóttir og Ríkarður Bergstað Ríkarðsson

The Central Bank has published an English translation of an article called, “What Does Iceland Owe?”, in its publication series Economic Affairs. The authors are Arnór Sighvatsson, Ásgeir Daníelsson, Daníel Svavarsson, Freyr Hermannsson, Gunnar Gunnarsson, Hrönn Helgadóttir, Regína Bjarnadóttir, and Ríkardur Bergstad Ríkardsson. The article peers through the maelstrom caused by the collapse of the financial system, causing the settlement of assets and liabilities according to official standards to give a misleading view of the debt position that will be the strongest determinant of Iceland’s welfare in coming years. In the report, the authors estimate the asset and liabilities values that are likely to emerge when the dust settles. This can be called Iceland’s “latent” debt position, although the term “underlying debt position” has also been used. Although there is still considerable uncertainty about the findings, it is virtually a certainty that, when the estates of the failed financial institutions have been settled and other factors that skew the overall picture have been accounted for, it will be revealed that Iceland’s net debt has not been lower in decades. Net public sector debt, on the other hand, will be considerably higher. The report also estimates the country’s latent current account balance, which (for the same reasons) is much more positive than official figures indicate, in part because accrued interest on the estates of the failed banks will never be paid.

February 2009
Ásgeir Daníelsson

Iceland than in other countries, nor has it been demonstrated that indexation is important in this context.

Fixed interest rates have a different type of impact on supply and demand for credit than variable interest rates do. This difference can be significant for the effectiveness of monetary policy if the policy rate is wielded so that real interest rates vary directly with inflation.

Equity and payments vary greatly over time, depending on whether the loans concerned are indexed and amortised or are equal-instalment loans. New loans constitute a higher percentage of total lending in the latter system, and this percentage varies directly with inflation. If monetary policy primarily affects the supply of new loans, this could explain the difference in monetary policy effectiveness.