In addition, the pool of financial products would increase and competition in financial services would be enhanced, thereby reducing the cost of capital. Simulations using the stylised dynamic stochastic general equilibrium model in Chapter 7 indicate that domestic real interest rates would decline, the domestic capital stock would grow, and GDP per capita would rise permanently if a small country such as Iceland were to join a larger currency area (see also Chapters 2 and 21 for a discussion of other countries’ experience). •  Upon joining the euro area, consumers would have access to a large market in which they could use their home currency. This would facilitate price comparison and boost competition. It would also be easier for domestic firms to gain a foothold in larger markets and benefit more from economics of scale in their operations and production. BIS central bankers’ speeches  5  •  With euro area membership, the risk associated with cross-border banking operations would be reduced, as banking would take place in the home currency to a larger degree and the ECB would be responsible for providing liquidity. As a result, it would be possible to ease the restrictions on cross-border banking that would otherwise be necessitated by foreign exchange risk and maturity mismatches in the banks’ foreign-denominated assets and liabilities. •  EU and euro area member countries are subject to requirements concerning public finances and other aspects of economic policy, which aim to improve policy discipline.
The króna is now worth only 0.05% of its value prior to the 1922 devaluation; in other words, it has depreciated by 99.95%. In terms of consumer prices, the króna has eroded in value even more, or about 99.99%. In other words, its purchasing power in terms of goods and services is currently only 0.013% of what it was in June 1944, when the Republic of Iceland was founded. Nevertheless, over this period, Iceland developed from being one of the poorest countries in Europe to one of the richest in per capita terms, despite the economic costs of persistent inflation. Currency depreciation and subsequent inflation episodes have sometimes expedited the necessary adjustment following economic shocks, however, thereby returning the economy more quickly to a path of economic growth. Chapters 3 and 12 focus on certain aspects of Iceland’s experience with an independent currency. In Chapters 9 and 13, two key questions are asked. First, how effective is monetary policy in achieving the goals with which it is tasked? Second, has the flexibility of the exchange rate facilitated economic adjustment and stability, or has it instead been a source of shocks? Summarising these findings reveals that Iceland’s experience of independent monetary policy and a flexible exchange rate has been poorer than that in many other countries, in that monetary policy has not been successful in achieving its goals and the flexible exchange rate has tended to be a source of shocks rather than a shock absorber.