This success has been achieved through ambitious professional and theoretical work which is one of the Bank’s main focuses. We became aware that other central banks following the same kind of policy had noted and commented on how carefully Iceland had prepared for the introduction of inflation targeting. It is aimed to strengthen the Central Bank’s research and theoretical work still further, and it is worth pointing out that the new legislation specifically states that it should undertake economic research relating to its tasks. Inflation targeting establishes itself Inflation targeting policies have established themselves in recent years, with a correspondingly large reduction in the number of countries which apply policies based on fixed but adjustable exchange rates, or exchange rates within a fluctuation range. The reason is not least that it proved increasingly difficult to adhere to a fixed exchange rate policy in a world of deregulated capital movements. It could be said that prevailing opinion identified only two possible exchange rate options: a floating exchange rate or a completely fixed one, for example through membership of a currency union, unilateral adoption of some other currency or establishment of a currency board. The new policy has produced good results and is applied in countries including Sweden, Norway, the UK, Australia and New Zealand, along with several countries in Eastern Europe, Latin America, Asia and Africa. It can also be argued that the European Central Bank partly follows the same kind of policy.
the interest terms at which  BIS Review 95/2001  1  financial institutions can borrow short-term capital from them, central banks can influence the volume and price of liquidity in the financial system. Central Bank interest rate decisions have an impact on short- and long-term interest rates, financial system liquidity, money in circulation and bank lending, exchange rates of currencies, other asset prices and, last but not least, market participants’ expectations about the future development of all these factors. All this, in turn, influences consumption and investment decisions of individuals and businesses, and thereby aggregate demand. The impact in individual areas can vary greatly from one time to the next. The new Central Bank Act The previous Central Bank Act dated from 1986 and was drafted over the period 1981 to 1984. It was a product of its time and did not reflect the perspectives that later established themselves. In the early 1990s the then Minister of Commerce appointed a committee to review the Central Bank Act, chaired by Professor Ágúst Einarsson, the current Dean of the Faculty of Economics and Business Administration. Following the committee’s work the Minister of Commerce proposed a bill to parliament for a new Central Bank Act which entailed sweeping changes from the 1986 Act, including what are now considered to be many of the necessary elements of central bank legislation. However, the bill was not adopted by parliament.