From control by capital to control of capital: Iceland's boom and bust, and the IMF's unorthodox rescue package

Silla Sigurgeirsd�ttir and Robert H. Wade

Review of International Political Economy, 2015, vol. 22, issue 1, 103-133

Abstract: For decades past the IMF has been a byword for economic orthodoxy, which included disapproval of policy limits on cross-border capital flows. But in 2012 it announced a new "institutional view" giving more scope for capital flow management and in effect restricting the rights of capital owners. The Fund's program in Iceland after the October 2008 crash helped to pave the way; it was the first time the Fund had endorsed capital controls in a developed country. The essay describes Iceland's boom and bust, and how the government and IMF tried to manage the crisis. With IMF support, the government implemented capital outflow controls, initially as an emergency response and then as a longer-term stabilization measure. The control regime evolved in a complicated "game", sometimes referred to in public debate as "the battle of Iceland", between the central bank implementing a professionally-led capital account liberalization strategy versus political parties seeking to turn the controls to their advantage. From this political economy perspective we explain why the "temporary" capital controls remain in place more than five years on. At the end we draw some broad lessons from the Iceland case for the financial booms and busts to come.

Date: 2015
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DOI: 10.1080/09692290.2014.920400

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