Rannveig Sigurðardóttir: Monetary and fiscal dimensions of responding to multiple global shocks

Keynote speech by Ms Rannveig Sigurðardóttir, Deputy Governor for Monetary Policy of the Central Bank of Iceland, at the 15th Annual Meeting of the OECD Working Party of Parliamentary Budget Officials and Independent Fiscal Institutions, Reykjavik, 13 April 2023.

The views expressed in this speech are those of the speaker and not the view of the BIS.

It is a pleasure to join you here to discuss the role and interaction of monetary and fiscal policy - a topic that deserves our full attention today in times of high inflation.

The global economy had barely recovered from the financial crisis when it was hit again by two subsequent shocks that have had enormous impact on both monetary and fiscal conditions around the globe. I want to give you a snapshot of how the Icelandic economy has weathered these shocks relative to other OECD economies, firstly, during the COVID-19 pandemic and subsequent supply-chain disruptions, and then, following Russia's invasion of Ukraine, the ensuing energy and food crises. Finally, I will discuss the role played by monetary and fiscal policies in response to these shocks.

Iceland was among the countries most severely hit by the global financial crisis (GFC). Prior to the crisis, the country was uniquely vulnerable due to macroeconomic imbalances, including a large current account deficit, unfavourable net international investment position, highly indebted households and business sector, inflated asset prices, and an oversized and undercapitalized banking sector. Iceland's strength, on the other hand, was the relatively strong position of its public finances. This set Iceland apart from several other countries that also suffered badly from the GFC, mainly because of vulnerability of public finances. In the aftermath of the crisis, the economy was rebalanced; the current account transformed from a deficit to a surplus; the international investment position changed from large net debt to significant net assets; a major share of private debt was wiped out; the banking system recapitalized; and asset prices deflated.