Iceland: Challenging Times for Monetary and Fiscal Policies

Michelis, Andrea De

doi:10.1787/221000115525

Cited by 3 publications

(1 citation statement)

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“…Empirical accounts of Iceland's crisis often emphasize that the enlarged banking sector -the growth of which is frequently traced to privatization and deregulation -swamped government's ability to serve as a lender of last resort (Carey 2009;de Michelis 2009;Wade 2009;Benediktsdóttir et al 2011;Schwartz 2011). Although privatization and limited government resources were important, this paper examines the deeper institutional origins of the crisis.…”

Section: Introductionmentioning

confidence: 98%

Demand for credit, international financial legitimacy, and vulnerability to crises: Regulatory change and the social origins of Iceland's collapse

Larson

2013

Regulation & Governance

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By analyzing how credit in Iceland expanded to culminate in the country's 2008 financial collapse, this article advances theories about financial crises, regulatory change, and the role of credit. It also complicates popular accounts of Iceland's collapse that focus on the actions of unrestrained bankers by examining the larger context that facilitated these banking practices. After financial liberalization, Icelandic businesses and households had strong demand for credit as a result of: (i) the institutional meaning of credit, (ii) an emergent growth strategy of aggressive international expansion, and (iii) increasing consumption. Incorporating business demand for credit extends demand-side theory of crises and shows how dominant strategy and shared government and business orientation toward opportunity shaped credit expansion. Credit-based consumption also stabilized social relations despite increasing inequality. Notwithstanding warnings of risk, regulation did not restrain risky leverage. International market reactions reinforced beliefs about Icelandic success to limit regulatory reach, as Iceland's international financial legitimacy produced market-based measures that leaders interpreted as signals of economic success.

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Section: Introductionmentioning

confidence: 98%

Demand for credit, international financial legitimacy, and vulnerability to crises: Regulatory change and the social origins of Iceland's collapse

Larson

2013

Regulation & Governance

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Iceland: The Financial and Economic Crisis

Carey

2009

OECD Economics Department Working Papers

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The global financial and economic crisis has struck Iceland with extreme force. Iceland’s three main banks, accounting for almost all of the banking system, failed in October 2008. They were unable to resist the deterioration in global financial markets following the failure of Lehman Brothers. The banks had pursued risky expansion strategies – notably borrowing in foreign capital markets to finance the aggressive international expansion of Icelandic investment companies – that made them vulnerable to the deterioration in global financial markets. They had also grown to be too big for the government to rescue. When access to foreign capital eventually closed, the banks failed. Non-financial firms and households were also vulnerable to the deterioration in global financial conditions, having taken on a lot of debt in recent years based on inflated collateral values. In some cases, the debt was foreign-currency denominated, without matching foreign-currency assets or revenues. In the wake of the banking crisis, the government obtained an IMF Stand-By Arrangement to provide favourable access to foreign capital markets and creditability for the recovery programme. Even so, the recession is likely to be deeper in Iceland than in most other OECD countries owing to the seriousness of the banking crisis and the weakness of private sector balance sheets. Reforms are needed to strengthen prudential regulation and supervision. This Working Paper relates to the 2009 Economic Survey of Iceland. Islande : La crise économique et financière La crise économique et financière mondiale a frappé l’Islande avec une violence extrême. Les trois principales banques du pays, qui représentaient pratiquement l’ensemble du système bancaire, ont fait faillite en octobre 2008. Elles n’ont pas réussi à résister à la détérioration des marchés de capitaux mondiaux dans le sillage de la faillite de Lehman Brothers. Les banques avaient suivi des stratégies de développement risquées – empruntant notamment sur des marchés financiers étrangers pour soutenir une expansion internationale dynamique des sociétés d’investissement islandaises – ce qui les a rendues vulnérables à la détérioration des marchés de capitaux mondiaux. Elles avaient également atteint une taille trop importante pour que le gouvernement puisse venir à leur rescousse. Lorsque l’accès aux capitaux étrangers a été finalement fermé, les banques ont fait faillite. Les entreprises non financières et les ménages – qui s’étaient massivement endettés ces dernières années profitant de la forte valorisation de leurs garanties – étaient aussi vulnérables à la détérioration de la situation financière mondiale. Dans certains cas, la dette était libellée en devises sans que les emprunteurs n’aient d’actifs ou de revenus dans ces devises susceptibles de compenser le risque de change. À la suite de la crise du système bancaire, les pouvoirs publics ont conclu un accord de confirmation avec le FMI pour assurer des conditions d’accès favorables aux marchés de capitaux étrangers et soutenir la crédibi...

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Law and Macroeconomics: The Law and Economics of Recessions

Listokin

2016

SSRN Journal

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In this Article, I offer a macroeconomic perspective on law that reshapes the microeconomic perspective that currently dominates law and economics. I argue that, first, the economy works one way in ordinary economic conditions, in which supply capacity determines output, and a different way when interest rates are zero. At the "zero lower bound" on short-term interest rates, spending demand determines output. Second, because the economy functions differently at the zero lower bound, a law causes one set of effects at the zero lower bound and a different set of effects at other times. And third, because the same law has diferent effects at different times, law should be different at the zero lower bound than in other times. Specifically, law should do more to promote spending when the macro-economy is characterized by zero interest rates than in ordinary economic conditions. Because the stakes of recessions in which interest rates hit the zero lower bound are so high-for instance, tens of trillions of dollars in lost output, countless lives impaired, and a much higher likelihood of political upheavals like Donald Trump's ascendancy to the U.S. Presidency-I argue that the (significant) costs associated with introducing macroeconomics into law are worth bearing.

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Iceland: Challenging Times for Monetary and Fiscal Policies

Cited by 3 publications

References 24 publications

Demand for credit, international financial legitimacy, and vulnerability to crises: Regulatory change and the social origins of Iceland's collapse

Demand for credit, international financial legitimacy, and vulnerability to crises: Regulatory change and the social origins of Iceland's collapse

Iceland: The Financial and Economic Crisis

Law and Macroeconomics: The Law and Economics of Recessions

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