Because it is more economical for business transactions and liabilities to be denominated as far as possible in the same currency, a fundamental change in the position of the króna is unlikely, except directly by an act of government, or indirectly in the highly improbable event that economic policies were to collapse and erode all confidence in the króna, with accompanying hyperinflation, as has happened in some Latin American countries that have adopted the dollar or others that have been forced to adopt another currency. It has sometimes been claimed that the heavy level of external debt means that interest rate decisions by the European Central Bank possibly have even more impact in Iceland than domestic monetary policy. There is nothing new about the impact of foreign interest rate developments being felt in Iceland - and the same applies to other countries as well - although the scale of Iceland’s foreign debt leaves its economy more susceptible to foreign interest rate movements. It is worth remembering that while foreign interest rate developments mostly affect Iceland’s national income, economic cycle and current account balance, they can never have a crucial impact on the domestic rate of inflation. A heavy weight of foreign currency-denominated borrowing in domestic debt may complicate the transmission mechanism of monetary policy. In the long run, however, only domestic monetary policy measures can determine a deteriorating value of the domestic currency vis-à-vis goods and services or to put it plainly, inflation. Prospects Finally, I shall turn to economic and monetary prospects.
We do not think, act or communicate in the same way today as we did when the inflation targeting regime was new. The driving force behind the changes has come partly from practical experiences, both in Sweden and other countries conducting inflation targeting. Academic research has also played an important role. Before I go into greater detail on how the Riksbank’s strategy has developed and how it looks today, let me begin by describing the background to the establishment of an inflation target in Sweden. Background to the introduction of an inflation target in Sweden On Sunday, 19 November, the Swedish krona will have been floating for exactly fourteen years. The date 19 November 1992 will always have a special significance for the Riksbank, as it was the day that we were forced to abandon the fixed exchange rate, under dramatic circumstances and following a dogged defence of the krona against speculation. This happened in the midst of the most serious economic crisis in Sweden since the 1930s – a crisis that can generally be described as a tragic climax to almost twenty years of stabilisation policy problems. The economic policy conducted during the 1970s and 1980s tended for various reasons to be overly expansionary and it proved difficult to maintain price rises and wage increases at a reasonable level.