Capital inflows, crisis and recovery in small open economies

Abstract

We compare two small open economics, Iceland and Ireland, that experienced a capital inflow through their banking systems in the period preceding the 2008 financial crises but differ in their currency arrangements. Both countries have mostly recovered from their respective crises, but the differences in the way their economies adjusted are interesting. The evidence suggests that changes in the real exchange rate served as the adjusting mechanism for Iceland's current account while in Ireland domestic demand compression served as the main adjustment mechanism. We also explore the adjustment to the crisis in three other Eurozone economies and find that they were similar to the one in Ireland.

Crises and capital controls in small open economies: a stock–flow consistent approach

“…11. Raza et al (2018) empirically investigate the current-account adjustment in Iceland and compare it to that of Ireland and other eurozone countries. 12.…”

Exploring the effects of capital mobility on the saving–investment nexus: evidence from Icelandic historical data

“…2 See, e.g., Keun-Yeob et al (1999), Katsimi and Zoega (2016), and Raza et al (2018b). mobility lasting from 1960 to 1994, a period of free capital mobility starting in 1994 when Iceland joined the European Union's single market and ending in 2008 and, finally, a period of capital controls reintroduced during a financial crisis in 2008 that were just relaxed in the spring of 2017.…”

“…This pressure tends to be stronger in countries without sovereign currencies, making them bow to the demand of international creditors as was the case in some eurozone countries. In most eurozone countries, the current account balances have rebounded but the economies experienced longer recessions.14 SeeZoega (2010), amongst others.15 SeeRaza et al (2018b) for the comparison of economic recovery in Iceland and Ireland.…”