Capital account regulation in Iceland. Does anybody know what is going to happen?

Abstract

This article analyzes the capital account regulation (CAR) applied in Iceland after the banking crash of October 2008, focusing on the determinants behind the implementation of this policy tool, its effects on economic performance, and its possible costs for the Icelandic economy. The previous literature on the topic is useful for these purposes but it does not provide an adequate framework for analyzing the Icelandic experience because Iceland is a very particular case within the group of countries that have historically resorted to CAR. Our main conclusions are that capital account regulation has been essential in stabilizing the currency after the banking crash, providing space for expansionary monetary policy, and keeping public debt yields low. Even though great uncertainty still surrounds the long-term prospects of the Icelandic economy, CAR implementation has been a step toward a promising future economic scenario.