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JSPES, Vol. 38, No. 4 (Winter 2013)
pp. 389 –424

The Rise and Fall of the Icelandic Economy

David Howden

St. Louis University – Madrid Campus

Iceland became the first developed country in 30 years to
request help from the IMF in 2009. While the depths of its recent
recession are well studied, the causes of its origin are still
misunderstood. This paper looks at two factors: (1) the blanket
guarantees provided to the Icelandic banking system by various
public agencies, and which fostered an environment of excessive risk taking; (2) a faulty inflation-targeting framework by the Central Bank of Iceland, which resulted in a credit binge engulfing the small island. While the first factor explains why Iceland´s banking sector grew as large as it did, the second accounts for the magnitude of the imbalances in both the real and financial sectors.