Monday 5 March 2012

Exports, Imports and Floating Krona

Been reading Leigh Harkness's papers recently due to my PhD and an idea of how to combine his optimum currency system with financial stability. From his arguments against the floating exchange rate system, I checked out the Icelandic data on imports and exports as a share of gross national income. The graph is below.

Exports and Imports as a share of Gross National Income in Iceland along with the growth of GNI from 1946. Notice how the series appear to break in 1960 when the import controls were abolished (we had a mess of import controls in Iceland 1930-1960, as somebody thought it would be a fantastic idea to react against shortage of income from abroad by preventing people to spend it on imports) and again when the krona was floated in 2001. 


Notice also that we had free flow of capital only during the period of 1994 to 2008. Yes, increased GNI during this time but imports more often than not higher than exports. That unbalance explodes after the privatisation of the banking system begins in 1997 and goes bonkers after 2001 when the krona is floated.

I find this interesting, I had never seen Harkness's website until late last year or so. I find his papers quite frankly too clear and how he connects the creation of credit to the current account deficit is so obvious I feel ashamed not have realised it fully on my own. Furthermore, his papers give an idea about what can be the outcome of a (Canadian) Dollarization in Iceland, although I have to admit that I find it unlikely it will happen since the political powers seem not to want to hear it as much as mentioned. Their direction is one way only: to Brussels.

Check out Leigh's site: http://www.buoyanteconomies.com/

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