EconPapers    
Economics at your fingertips  
 

The Icelandic banking collapse - was the optimal policy path chosen?

Thorsteinn Thorgeirsson and Paul Van den Noord

Economics from Department of Economics, Central bank of Iceland

Abstract: This study examines the economic policies of the Icelandic government in the wake of the banking collapse of 2008 in terms of counter-factual policy options. The path chosen was important for the recovery but policy makers faced alternative policy options for handling the many difficult situations that arose, with potential implications for government finances and economic growth. We utilize two complementary macroeconomic models to assess the decisions taken and the recovery and on that basis develop counter-factual scenarios of how the crisis could have played out if the decisions had been different. Four alternative scenarios are considered involving different ways to deal with the collapse: i) adopt a more pro-cyclical fiscal policy, ii) allow the ISK exchange rate to drop without imposing capital controls, iii) pay the interest expense on the initial Icesave agreement, or iv) rescue the banks as Ireland did. Macroeconomic model simulations are performed to assess the impact of different decisions involving public finances on economic growth, unemployment and other macroeconomic variables over the period 2008-2025. The results are compared to the actual path taken. Addressing this question is potentially interesting in its own right and also from the point of view of other countries that have experienced similar crises but have responded differently.

Date: 2013-03
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.cb.is/library/Skr%C3%A1arsafn---EN/Working-Papers/WP%2062.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 File not found (http://www.cb.is/library/Skr%C3%A1arsafn---EN/Working-Papers/WP%2062.pdf [301 Moved Permanently]--> https://www.cb.is/library/Skr%C3%A1arsafn---EN/Working-Papers/WP%2062.pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ice:wpaper:wp62

Access Statistics for this paper

More papers in Economics from Department of Economics, Central bank of Iceland Contact information at EDIRC.
Bibliographic data for series maintained by Central Bank of Iceland ( this e-mail address is bad, please contact ).

 
Page updated 2025-03-30
Handle: RePEc:ice:wpaper:wp62