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OECD Economic Surveys: Iceland 2008

image of OECD Economic Surveys: Iceland 2008

OECD's periodic survey of the Icelandic economy. This edition examines the major economic challenges faced by Iceland in 2008, in particular a more effective monetary policy, strengthening the fiscal framework, and improving cost-effectiveness in the health care sector.

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Towards a more effective monetary policy

In response to renewed inflationary pressures, monetary policy needs to remain tight until inflation expectations have moved back to and are well anchored at the policy target. While excessive inflation has persisted despite large increases in the policy rate, monetary policy has the capacity to stabilise the economy. The Central Bank’s communication strategy has greatly improved but arguably policymakers have continued to react too slowly to new information and to be overly optimistic about the inflation outlook. As well, reforms in the financial sector, above all the long-awaited restructuring of the Housing Financing Fund, and refinements to the inflation targeting framework would strengthen the transmission mechanism of monetary policy. In view of these considerations, unilaterally adopting the euro and thereby sacrificing a potentially effective stabilisation tool would not seem warranted currently.

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