Explaining the Case of Icelandic Currency Crisis

This paper tries to explain the recent currency crisis in Iceland and draw some policy lessons. It shows that the recent currency crisis in Iceland is mainly due to a loose monetary policy preceding the crisis. Structural reforms which could have prevented the occurrence of the crisis were missing. We choose to explain the crisis using a least squares method where a set of fundamental per capita, real sector and institutional variables are combined and compared to the Euro zone ones in order to explain the November 2008 turbulence. The results show that the 2008 credit crunch in us economy was relevant to the crisis in Iceland joined by the fundamentals of the country’s economy was the reason for this inconvenience