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OECD Economic Surveys: Iceland 2003

image of OECD Economic Surveys: Iceland 2003

This 2003 edition of OECD's periodic review of Iceland's economy examines recent economic developments, policies and prospects and includes special features on controlling public spending and structural policy developments.

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Macroeconomic Policies

Macroeconomic management has helped overcome the domestic and external imbalances that developed during the period of overheating in the late 1990s. The floating of the currency and switch to an inflation-targeting framework in March 2001 has been successful to date. Although the exchange rate temporarily undershot its equilibrium value, the resulting redirection of activity towards exports contributed to the restoration of external balance. And, while price performance deteriorated early in the new regime, the weakening in activity generated in part through a tight monetary stance has helped to bring inflation back to its target. Given the substantial budget surpluses that were realised in the late 1990s, a government deficit has been avoided. The fact that the fiscal stance became slightly restrictive last year has helped and resulted in a more appropriate policy mix. At the current juncture, the difficult task facing policymakers is to balance a modest degree of near-term economic slack against the strong likelihood of a sharp acceleration in growth from next year onwards.

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