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Europe > Iceland

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Cover IMF Staff Country Reports
Iceland: 2024 Article IV Consultation-Press Release; and Staff Report
International Monetary Fund. European Dept.
The 2024 Article IV Consultation with Iceland highlights that following an impressive recovery from shocks in recent years, tight monetary and fiscal policies have slowed domestic demand growth, strengthened the current account, and started to lower inflationary pressures. A coordinated tightening of macroeconomic policies has successfully narrowed domestic and external imbalances built up during the post-pandemic period. Appropriately tight macroeconomic policies are expected to dampen economic growth in the near term, while medium-term growth prospects are favorable. Reactivation of the fiscal rules in 2026 presents an opportunity to revisit their design to ensure fiscal policy is both sustainable and contributes to macroeconomic stability. An application of the IMF’s Integrated Policy Framework to Iceland suggests some benefits of foreign exchange interventions during times of stress. Structural policies should focus on gradually reducing state involvement in collective wage bargaining, accelerating the green transition, and further diversifying the economy.
Keywords:
monetary policy stance; holdings of SDR; calibrating Policy; inflation expectation; EU regulations-credit bureaus; Inflation; Central bank policy rate; Housing prices; Fiscal rules; Global
Cover IMF Staff Country Reports
Iceland: Selected Issues
International Monetary Fund. European Dept.
This Selected Issues paper presents a pilot study on integrated policy framework (IPF) in Iceland. The IPF helps assess the appropriate policy responses to shocks for economies vulnerable to capital flow volatility, allowing for some market frictions. Iceland is an advanced economy pilot under the IPF with some of the frictions identified under the IPF framework. The Central Bank of Iceland implements an inflation targeting regime with the possibility of currency intervention within its mandate. The foreign exchange (FX) market in Iceland is assessed to be shallower than in other advanced economies, especially around episodes of global economic and financial stress. Foreign currency assets are mainly due to portfolio allocation of the large pension sector. The authorities should explore options to deepen the foreign currency derivatives market in a manner consistent with continued foreign exchange market stability. Iceland has a history of disruptive speculative foreign currency trading, which points to the need for moving cautiously with reforms to deepening the FX derivatives market. Reforms that could be explored include reassessing the limits on commercial banks’ derivative transactions. This would encourage greater participation of foreign investors in the domestic bond market and facilitate hedging of FX risk, thereby reducing the likelihood of disruptive exchange rate movements.
Keywords:
inflation expectation; FX Market shallowness; QIPF model; Iceland pilot study; staff team of the International Monetary Fund; Currency markets; Inflation; Central bank policy rate; Global
Cover IMF Staff Country Reports
Euro Area Policies: 2023 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Euro Area; IMF Country Report No. 23/264
International Monetary Fund. European Dept.
The 2023 Article IV Consultation discusses that the euro area economy has shown remarkable resilience in the aftermath of Russia’s invasion of Ukraine and the largest terms of trade shock in several decades, thanks to a swift policy response and a strong rebound in contact-intensive services. Looking ahead, growth is expected to pick up gradually throughout 2023 and 2024, supported by a recovery in real incomes in the context of continued tight labor market conditions, a further easing of supply constraints, and firmer external demand, even as financial conditions continue to tighten. While headline inflation has fallen sharply recently after reaching record high levels, core inflation is proving more persistent. As tight financial conditions restrain demand and supply shocks dissipate further, inflation is set to decline further but is expected to remain elevated for an extended period. Renewed supply shocks, which could result from an escalation of the war in Ukraine and a related increase of commodity prices, or a further intensification of geoeconomic fragmentation, would also push up inflation and hurt growth. On the upside, the economy could again prove more resilient than expected, especially amid a still large stock of excess savings.
Keywords:
Euro area headline inflation; inflation expectation; EU climate investment fund; EU AML authority; EU institution; EU bank; core inflation; EU economy; Inflation; Energy prices; Fiscal stance; Monetary tightening; Global; Europe
Cover IMF Staff Country Reports
Iceland: 2023 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Iceland
International Monetary Fund. European Dept.
The 2023 Article IV Consultation discusses that the Icelandic economy has shown remarkable resilience and rebounded quickly from the multiple shocks in recent years. The economy is currently operating well above potential, which, together with high import and house prices, has pushed inflation significantly above target, and contributed to external imbalances. While growth is expected to moderate to 3.2 percent in 2023 and 1.9 percent in 2024 on headwinds from abroad and tight macroeconomic policies, the medium-term outlook is favorable. In the near term, policy tightening coupled with headwinds from the deteriorating terms of trade will dampen domestic demand and reduce imbalances, though private consumption growth is likely to remain robust on a further drawdown of household savings and strong employment growth supported by continued immigration. Banks could face funding pressures if pension funds were to re-direct their investments from domestic to foreign markets.
Keywords:
inflation expectation; headline inflation; monetary policy horizon; deteriorating inflation outlook; cash flow; policy tightening; Inflation; Fiscal stance; Pension spending; Financial Sector Assessment Program; Government finance statistics; Global
Cover IMF Working Papers
Effective Fiscal-Monetary Interactions in Severe Recessions
Mr. Jiaqian Chen
,
Mr. Raphael A Espinoza
,
Carlos Goncalves
,
Tryggvi Gudmundsson
,
Martina Hengge
,
Zoltan Jakab
, and
Jesper Lindé
The COVID-19 pandemic and the subsequent need for policy support have called the traditional separation between fiscal and monetary policies into question. Based on simulations of an open economy DSGE model calibrated to emerging and advance economies and case study evidence, the analysis shows when constraints are binding a more integrated approach of looking at policies can lead to a better policy mix and ultimately better macroeconomic outcomes under certain circumstances. Nonetheless, such an approach entails risks, necessitating a clear assessment of each country’s circumstances as well as safeguards to protect the credibility of the existing institutional framework.
Keywords:
monetary policy rate; government spending hike; recession scenario; rate in Botswana; hike in liquidity trap; open economy; Inflation; Inflation targeting; Fiscal stimulus; Africa; Global
Cover IMF Working Papers
Housing Boom and Headline Inflation: Insights from Machine Learning
Yang Liu
,
Di Yang
, and
Mr. Yunhui Zhao
Inflation has been rising during the pandemic against supply chain disruptions and a multi-year boom in global owner-occupied house prices. We present some stylized facts pointing to house prices as a leading indicator of headline inflation in the U.S. and eight other major economies with fast-rising house prices. We then apply machine learning methods to forecast inflation in two housing components (rent and owner-occupied housing cost) of the headline inflation and draw tentative inferences about inflationary impact. Our results suggest that for most of these countries, the housing components could have a relatively large and sustained contribution to headline inflation, as inflation is just starting to reflect the higher house prices. Methodologically, for the vast majority of countries we analyze, machine-learning models outperform the VAR model, suggesting some potential value for incorporating such models into inflation forecasting.
Keywords:
Housing Price Inflation; Rent; Owner-Occupied Housing; Machine Learning; Forecast; machine-learning model; machine learning method; housing boom; D. forecasting result; Inflation; Housing prices; Housing; Consumer price indexes; Global; Europe; Australia and New Zealand; North America; Caribbean; VAR model
Cover IMF Staff Country Reports
Iceland: 2022 Article IV Consultation - Press Release; and Staff Report
International Monetary Fund. European Dept.
This 2022 Article IV Consultation discusses that Iceland has weathered recent shocks to the economy relatively well. Well-designed policy measures and a solid health system eased the impact of the pandemic, allowing real gross domestic product and employment to recover strongly. Robust domestic demand and favorable terms of trade boosted output growth to 4.3 percent in 2021, despite slower recovery in tourism. Growth is expected to remain moderate in 2022 and the medium term. Careful policy coordination is required to entrench the recovery, stem risks and rebuild buffers to pre-pandemic levels. Policies should mitigate the flaring-up in inflation, external imbalances, and house prices. Structural reforms should facilitate economic diversification and make the economy more resilient to shocks. Diversification efforts should focus on easing regulatory burdens on start-ups and spurring innovation by leveraging Iceland’s human capital and advanced digital infrastructure. The new collective wage agreement can also foster diversification and resilience through better alignment of wage and productivity growth.
Keywords:
inflation expectation; liability positions vis-à-vis nonresident; steering inflation; housing policy; data standard; rising prices; policy coordination; Inflation; Housing prices; Housing; Government finance statistics; Central bank policy rate; Global
Cover IMF Staff Country Reports
Iceland: Selected Issues
International Monetary Fund. European Dept.
Selected Issues
Keywords:
ISCR; CR; OOH cost; Iceland fish catch; CPIXH inflation; Iceland fishing quota holder; inflation index; CPI inflation; benchmark index; Agroindustries; Inflation; Inflation targeting; Consumer price indexes; Housing prices; Global; Australia and New Zealand
Cover IMF Staff Country Reports
Iceland: Selected Issues
International Monetary Fund. European Dept.
This paper analyzes the explosion of tourism in Iceland, which has surged above all expectations. The number of tourists has almost quadrupled since the Eyjafjallajökull eruptions in 2010, establishing tourism at the heart of the economy. Tourists do not seem to be driven mainly by rising incomes at home, nor have they been deterred by rising costs on the back of króna appreciation—which leaves Iceland’s tourism boom largely unexplained by standard econometric models. Instead, Iceland’s natural wonders, welcoming atmosphere, general safety, improving connectedness, and social media outreach have drawn in visitors. Going forward, tourism is likely to grow less rapidly than in recent years, yet remain at strong levels.
Keywords:
ISCR; CR; Iceland; bank credit growth; post GFC recovery; tourism competitiveness report; NRIR estimate; LWPRF model; macroeconomic variable; Bank credit; Tourism; Inflation; Real interest rates; Credit; Global; Europe
Cover IMF Staff Country Reports
Iceland: 2014 Article IV Consultation and Fifth Post-Program Monitoring Discussions-Staff Report; Press Release; and Statement by the Executive Director for Iceland
International Monetary Fund. European Dept.
This 2014 Article IV Consultation highlights that Iceland has reached a relatively strong macroeconomic position with good growth prospects. Unemployment continues to trend down, now at 4 percent. Growth is expected to pick up to about 3 percent over 2015–17, supported by robust domestic demand and tourism. Consumption will be boosted by household debt relief and—together with net trade—will benefit from favorable commodity prices. Good progress has also been made in improving the financial stability framework, but gaps remain.
Keywords:
ISCR; CR; inflation expectation; balance of payments; crisis legacy; liberalization strategy; IMF staff projection; central bank; Capital account liberalization; Inflation; Income; Global; Europe