Már Guðmundsson: Monetary policy after capital controls Speech by Mr Már Guðmundsson, Governor of the Central Bank of Iceland, at the Annual General Meeting of the Confederation of Icelandic Employers, Reykjavík, 7 April 2016. *  *  *  Madame Chairman, honoured guests, In my speech today, I would like to discuss the monetary policy that might be appropriate for Iceland after the broad-based restrictions currently imposed on capital outflows have been lifted. More specifically, I will discuss the monetary policy framework rather than its implementation, which would naturally depend on economic conditions and prospects at any given time. But what is meant by monetary policy? In the modern sense of the term, monetary policy entails applying the Central Bank’s balance sheet and other instruments at the Bank’s disposal so as to affect the economy. In that sense, entering a currency union is not monetary policy; it is currency policy. Only central banks can pursue monetary policy, while governments take decisions on currency policy. In my discussion today, I assume that we will pursue independent monetary policy, at least in the near future. Designing a monetary policy framework entails deciding what its objectives should be, which policy instruments should be applied, how decisions on the application of those instruments should be taken, how these decisions should be communicated, and how accounting for monetary policy after the fact should be handled. Exchange rate policy is naturally an important part of this framework; i.e., whether the exchange rate is pegged, free-floating, or somewhere in between.
Its final form will be a joint declaration by the Government and the Central Bank, like that dating from 2001. The discourse will therefore continue. In this context, I would like to thank the Confederation of Icelandic Employers for having this topic on its agenda today and for giving me the opportunity to express my views on the subject. But we must keep one thing in mind. The new framework will be better than the one we had before the crisis, but it will not be a panacea. Monetary policy is limited in terms of what it can deliver in the long run, and it will continue to be implemented under conditions of uncertainty in a constantly changing world. Under most circumstances, however, it should be able to provide us with medium-term price stability, and that is no small achievement. BIS central bankers’ speeches  5