The Board of Governors’ policy statement said the following: “If the decrease does not reverse, it is clear that inflation will rise sharply, and persistent inflation will be imminent if nothing is done, with the accompanying upward spiral of prices, wages, and exchange rates against foreign currencies. The depreciation of the króna in recent weeks is also harmful to the balance sheets of indebted households and companies and undermines the stability of the financial system over the long term. Thus it is critical that the depreciation of the króna be reversed as soon as possible.” The market’s response to the Board of Governors’ decision was favourable, and that is well, but at this point it is not possible to assert whether this decision will generate the results the Board of Governors intended. The next edition of Monetary Bulletin, the Bank’s principal publication on economic issues, is in the final preparatory stages and will be published on April 10. It will include an appraisal and forecasts by the Bank’s experts as regards the current economic climate and the likely developments in the near future. Because this next issue of Monetary Bulletin is forthcoming in such a short time, I have chosen not to discuss current issues at length today, though it was tempting to do so. The media discourse on the size of Iceland’s foreign reserves and the strength of the Central Bank and the Icelandic government is often misleading.
  as precaution against possible abrupt capital outflows (the “sudden stop” syndrome)    and, finally, to provide liquidity to domestic financial institutions. (Obstfeld et al. 2009). That use of foreign exchange reserves was especially apparent in 2008 when Central Banks in many emerging (and some industrialized) countries put those reserves at work to ease domestic tensions created by dollar liquidity shortages. The costs of holding reserves are also well identified:   intermediation of national savings by a public entity is never neutral. By nature, those entities don’t have the same risk appetite and liquidity preference as private agents. A significant part of national savings (up to 30% in some countries) might find itself subject to a “directed” allocation towards liquid instruments denominated in foreign currency.   as a consequence, there is a direct opportunity cost because foreign exchange reserves’ risk / return profile may be lower than for other, alternative, investments.   finally, as reserves accumulate, countries are getting increasingly exposed to exchange rate risk and face the possibility of significant valuation losses. This kind of cost / benefit analysis seems less and less able, however, to account for the true behavior of reserve holders. First there may be immeasurable, but very powerful, benefits such as increased security, lower external interest rates and lower exchange rate variability over the long run. Second, part of the costs may be borne by the system itself and not fully internalized by each individual country.