JSPES,
Vol. 38, No. 4 (Winter 2013)
pp. 389 –424
The Rise and Fall of the Icelandic Economy
David Howden
St. Louis University – Madrid Campus
Iceland became the first developed country in 30 years to
request help from the IMF in 2009. While the depths of its recent
recession are well studied, the causes of its origin are still
misunderstood. This paper looks at two factors: (1) the blanket
guarantees provided to the Icelandic banking system by various
public agencies, and which fostered an environment of excessive risk
taking; (2) a faulty inflation-targeting framework by the Central
Bank of Iceland, which resulted in a credit binge engulfing the small
island. While the first factor explains why Iceland´s banking sector
grew as large as it did, the second accounts for the magnitude of the
imbalances in both the real and financial sectors.
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