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You will prepare and submit a term paper on Economic. Your paper should be a minimum of 1750 words in length.

You will prepare and submit a term paper on Economic. Your paper should be a minimum of 1750 words in length. A number of reasons are available for this. For example, the structure of the Icelandic economy makes independent monetary policy more difficult to implement, national and international economic and financial market conditions have been highly unusual, and the formulation of monetary policy, which did not succeed in gaining sufficient credibility, was somewhat imperfect. Moreover, increased globalization of the national financial system and its rapid growth are likely to have weakened the transmission channels of monetary policy and increase the underlying risk in the financial system, which magnified the volatility of the exchange rate. Sufficient co-ordination between monetary and fiscal policy was also lacking, which exacerbated the negative side effects of financial restraint.

A fixed exchange rate regime has advantages and disadvantages. The main benefit is the uncertainty accompanying exchange rate fluctuation is reduced, particularly if the peg proves credible and speculative attacks can be avoided. If Iceland were to adopt a fixed exchange rate regime, it would be most obvious from an economic point of view to peg the krona to the euro. Such a regime could be implemented in different ways. Experience from the financial crisis, both in Iceland and elsewhere, indicates a need for further strengthening of monetary policy and macroeconomic policy in general. The experience of recent years highlights the importance of implementing stabilization policy so as to hinder rapid, unsustainable asset price inflation, which is usually accompanied by excessive credit expansion. It is also important to prevent the banking system from creating risks that are beyond the ability of the national authority to deal with it. The paper analyses policy adoption by monetary and fiscal authorities in the recent years as well as the coming years in Iceland.

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