20 December 2010

Monetary policy after capital controls

The Central Bank of Iceland has published a report on domestic monetary policy and submitted it to the Minister of Economic Affairs. The report summarises the main viewpoints concerning Iceland’s future exchange rate and monetary policy regime.

The report notes that the economic programme of the Government and the International Monetary Fund (IMF) is scheduled for completion in 2011 and that the capital controls will need to be lifted sometime thereafter, although the timing has not yet been determined. Consequently, it is timely to formulate the framework for exchange rate and monetary policy that will replace the framework provided by the programme.

The report covers possible reforms to the framework for monetary policy based on inflation targeting, including how systematic foreign exchange market intervention, macroprudential tools, and improvements in the interaction between monetary policy and fiscal policy can contribute to enhanced economic stability. While the report aims to provide an overview of possible improvements, actual policy must be adapted more closely to Icelandic conditions once the future framework has been decided.

The Icelandic version of the report, entitled “Monetary Policy after Capital Controls”, can be found on the Central Bank of Iceland website: www.sedlabanki.is. An English version will be available early next year.

Further information can be obtained from Már Guðmundsson, Governor, and Thorarinn G. Petursson, Chief Economist, at tel: +354 569 9600.

No. 36/2010
20 December 2010