Iceland had a period of policy incoherence and ineffectiveness before embarking in the mid-1980s on a long process of financial liberalisation and less accommodating policy. It switched in the early 1990s to loose exchange rate targeting, and in 2001 to loose inflation targeting, which was formally maintained through the period albeit with targets repeatedly overshot during the years of severe banking crisis 2006-12.


Years Targets and attainment Classification
1974-84 exchange rate (fixed, with no autonomous forex market) depreciated frequently to maintain competitiveness, recurring budget deficits and fiscal dominance, credit budget targets almost always overshot: financial system highly regulated; monetary instruments ineffective and application erratic, monetary policy objectives prioritise full employment, policy generally accommodating; inflation between 30% and 85% unstructured discretion UD
1985-92 exchange rate (fixed rather than targeted) adjusted less often, with depreciation limited to help restrain inflation, especially from 1989; new currency basket 1992, devaluations 1992, 1993; financial liberalisation including end of credit ceilings, freeing of interest rates (now positive in real terms), and later capital account liberalisation; attempts to limit monetary financing of deficits; growing emphasis on primacy of price stability; inflation falls to single figures from 1991 loosely structured discretion LSD
1993-2000 interbank forex market from May 1993; currency pegged to basket with +/-2.25% margins, then from August 1995 6%, from February 2000 9% (but currency remains within original margins until 1998); continuing financial liberalisation, such that interest rates and OMOs become clearly the main monetary instruments loose exchange rate targeting LERT
2001-05 currency floated; central bank given instrument independence; wide inflation targets (2.5% point target with higher upper tolerance ranges for 2001 and 2002, then 3% symmetric range from 2003) met; refinements to inflation targeting procedures loose inflation targeting LIT
2006-12 inflation targets repeatedly overshot (and inflation expectations go outside tolerance range) in context first of domestic boom plus financial market issues and then severe domestic impact of global financial crisis: commitment to price stability remains but other objectives important; temporary (but persistent) use of capital controls; further refinements to IT procedures, plus debate on reinforcements and alternatives to IT loosely structured discretion LSD
2013-17 wide inflation targets met, expectations within tolerance range; continuing high forex intervention designed to reduce volatility and rebuild reserves, less after reliberalisation of capital account 2017; some changes to IT framework under consideration loose inflation targeting LIT

Selected IMF references: RED 1980 pp26-30; SR 1980 pp4-5; RED 1982 pp22-3, 39-40; RED 1984 p32; RED 1987 pp25-6, 33; RED 1989 pp30, 42-3; RED 1992 pp1-2, 18; SR 1992 pp5-6, 8-9; RED 1994 pp1-2, 13-14; RED 1997 pp48-50, 87, 96-7; SI 1999 pp6-8, ch IV; SISA 2001 ch II; SR 2006 pp16-17; SR 2007 pp5-6, 12-14; SR 2008 p24; SR 2010 p21; SI 2012 ch II; SR 2013 p21; SR 2015 p21; SR 2017 pp16-18; SR 2018 pp12-14.

Additional source: Andersen and Guðmundsson (1998).

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