The war in Ukraine has not affected trade directly  Although the war in Ukraine has affected Iceland’s terms of trade, the net effect is ambiguous, with the prices of both imports and exports rising. Iceland is an exporter of both metals (mainly aluminium) and food products and thus has both gained and suffered from rising raw material and food prices. Terms of trade have remained favourable, although they have declined from their recent peak. Despite access to abundant domestic renewable energy, imported fossil fuels impact the Icelandic value chain both through the price of imported fuels, various imported goods and generally the cost of transportation, which is high given Iceland’s remoteness from major markets. Fuel is also an important cost item in fisheries. Rising import prices, however, result not only from the war in Ukraine, but can be partly explained by supply-chain disruptions and the container cost crisis triggered by a reallocation of resources in the global economy as it recovered from the pandemic. The cost increases seep into the global value chain and affect inflation globally. Eventually those mismatches are being resolved from the supply side, as firms respond to price signals, and from the demand side, with global tightening of monetary conditions and the withdrawal of fiscal stimulus. Mismatches are being resolved by increased supply and global tightening  The post-pandemic recovery in Iceland has two distinguishing features that set it apart from the recovery in most other OECD economies.
13 April 2023  Monetary and Fiscal Dimensions of Responding to Multiple Global Shocks Presentation at the 15th Annual Meeting of the OECD Working Party of Parliamentary Budget Officials and Independent Fiscal Institutions by Rannveig Sigurðardóttir, Deputy Governor for Monetary Policy, Central Bank of Iceland It is a pleasure to join you here to discuss the role and interaction of monetary and fiscal policy - a topic that deserves our full attention today in times of high inflation. The global economy had barely recovered from the financial crisis when it was hit again by two subsequent shocks that have had enormous impact on both monetary and fiscal conditions around the globe. I want to give you a snapshot of how the Icelandic economy has weathered these shocks relative to other OECD economies, firstly, during the COVID-19 pandemic and subsequent supply-chain disruptions, and then, following Russia’s invasion of Ukraine, the ensuing energy and food crises. Finally, I will discuss the role played by monetary and fiscal policies in response to these shocks. Iceland was among the countries most severely hit by the global financial crisis (GFC). Prior to the crisis, the country was uniquely vulnerable due to macroeconomic imbalances, including a large current account deficit, unfavourable net international investment position, highly indebted households and business sector, inflated asset prices, and an oversized and undercapitalized banking sector. Iceland’s strength, on the other hand, was the relatively strong position of its public finances.