Examples include the troubles encountered by banks in Finland, Norway and Sweden a decade ago and the crises that hit Asia and Latin America in the latter part of the 1990s. The Central Bank of Iceland has now built up a new organisational department, the Financial Stability Department, which has the main role of monitoring factors affecting financial stability. Twice a year the Bank publishes articles on this topic in its quarterly Monetary Bulletin, an annual main study in May and a shorter account in November. In addition, the Central Bank and Financial Supervisory Authority maintain close and productive cooperation, each seeking to ensure the security of the Icelandic financial system in its respective way. Inflation targeting To return to monetary policy itself, we should recall the joint declaration on the inflation target and changed monetary policy which was issued on March 27 by the Government and the Central Bank of Iceland. See the Central Bank of Iceland’s Monetary Bulletin 2001/2 With this declaration, the monetary framework was changed and inflation targeting was adopted, whereby the fixed exchange rate with fluctuation limits was replaced by a floating exchange rate. The inflation target was set at 2½%, measured as the twelve-month rise in the CPI. The declaration stated that if inflation deviated by more than 1½% from this target the Bank was obliged to bring it back within the tolerance limits as soon as possible.
There has been a gradual increase in support for the view that it is natural to set central banks straightforward targets which are suited to the instruments they use, and to strengthen their independence to take action and their financial independence while at the same time making firm requirements about transparency and accountability towards the government and general public. Treasury access to central bank funding was closed. Simple target-setting for central banks largely involved assigning a single main objective to monetary policy, i.e. to promote price stability, which means a low level of measured inflation. In some countries, central banks were assigned the task of defining their own main objectives, but elsewhere this was done by governments, or in cooperation between the government and the central bank. These viewpoints are reflected in central bank legislation of many countries and in the Maastricht Treaty’s provisions for the establishment and activities of the European Central Bank. Another widespread central bank objective in recent years has been to contribute to the stability of the financial system, including payments systems. Many central banks have been devoting increasingly more scope to this topic, reflecting the need which has been identified following the deregulation of international capital movements. At global level, a much higher profile has been given to active monitoring of financial activities and maintaining an active overview of various risk factors in financial systems and the economy as a whole, in order to attempt to prevent serious shocks.