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02.10.2015

Málstofa: Fjármagnsvæðing og gengissveiflur

Bygging Seðlabanka Íslands

Málstofa um fjármagnsvæðingu og gengissveiflur í litlum og opnum hagkerfum verður haldin miðvikudaginn 7. október 2015 kl. 15:00 í Sölvhóli, fundarsal Seðlabanka Íslands, Kalkofnsvegi 1 í Reykjavík.

Málshefjandi er Hamid Raza, doktorsnemi við háskólann í Limerick á Írlandi.

Málstofan verður á ensku.

Útdráttur / abstract:

The period preceding the financial crisis was marked by low interest rates and wide current account (CA) imbalances between creditors and borrowers. Absence of exchange rate risk in the eurozone allowed countries like Ireland to borrow at lower costs, while Iceland through high interest rates attracted inflows by creating an opportunity for the carry trade. Borrowing for Iceland with a floating krona came at a much larger cost due to overvaluation but less emphasis was placed on the exchange rates risks until the eruption of the crisis. Since the onset of the crisis, the CA imbalance has contracted in both of these small economies; however Iceland has experienced a currency crisis as well as a rise in inflation, a problem Ireland avoided due to its membership of the EMU. This paper investigates the pre and post crisis role of exchange rates in Ireland and Iceland using a Structural VAR (SVAR) model. Our findings can be summarised as follows: 1) We empirically confirm the role of interest rate differentials in attracting inflows and its subsequent effect on appreciation of the krona. We find strong evidence of exchange rate pass-through to domestic prices in Iceland. 2) We find that inflows have a much stronger impact on the real exchange rate in Iceland as compared to Ireland, 3) Finally, we analyse the role of exchange rate in adjustment to the crisis, finding that adjustment of the current account in Ireland is typically due to domestic demand compression, while in Iceland, demand compression is accompanied by expenditure-switching which has helped in a rapid adjustment to the crisis.

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