Monetary policy prior to inflation targeting
Monetary policy prior to inflation targetingAn inflation target was introduced at the end of March 2001. Until that time, ever since the middle of the last century, various kinds of fixed exchange rate policies had been in effect. As a rule the policy was relatively flexible, although to varying degrees. An article on the history of exchange rate arrangements in Iceland is pending publication in Icelandic in Fjármálatíðindi (2001).
For the greater part of the period, the entire monetary framework differed radically from the present arrangement. In Iceland, for example, modern financial markets did not reach maturity, so to speak, until the last decade of the 20th century, and an organised interbank foreign exchange market first started operation in 1993. In effect, the necessary framework for modern monetary policy implementation was not in place until a few years ago.
Since the foreign exchange market commenced operation, exchange rate policy has gradually evolved towards greater flexibility. During the market’s first years the fluctuation band was 2¼% in either direction from the central value of the official exchange rate index. In 1995, following the deregulation of capital movements, the band was widened to ±6%, and to ±9% at the end of February 2000. In late March 2001, the fluctuation band was finally abolished.*
Similarly, the Central Bank’s operating environment has changed dramatically. Under new legislation the Bank has been granted full independence to make monetary decisions without government and ministerial intervention. This will strengthen forward-looking monetary policy still further and contribute to the attainment of the Bank’s inflationary target.**