Working Paper No. 79: The Central Bank of Iceland's Liquidity Management System
Date: March 2019
Author: Ragnheiður Jónsdóttir
The Central Bank of Iceland has published a Working Paper analysing its Liquidity Management System. The paper is in English and accessible on the Bank‘s website.
This paper aims to answer the question of what kind of liquidity management system would be optimal for Iceland with respect to two important considerations: one is the current environment of surplus reserves and the other is Iceland’s specific character of being a very small, open economy with its own currency. The theory behind monetary policy implementation is discussed as well as the various origins of surplus reserves, their characteristics and implications for the conduct of monetary policy. The reasons for the steep accumulation of surplus reserves in the Icelandic banking system are considered and fluctuations in reserves are found likely to persist because the economy is small, open and uses managed float of its currency. Four different types of liquidity management systems at central banks are discussed in turn and the examples of Sweden, Norway and Denmark considered in that context. Finally, some conclusions are provided on the optimal system for Iceland.