Separating the Wheat from the Chaff: Icelandic and Irish Policy Responses to the Banking Crisis

When the tales of the Icelandic and Irish crises are told, they are framed as if one country did everything right to exit recession. In this paper I assess their recovery policies and find that the truth lies somewhere in the middle. By allowing its banking system to suffer substantial losses, Iceland shielded its citizens from the costly debt overhand apparent in Ireland. Ireland’s commitment to open capital markets and price deflation has allowed trade flows to remain robust, and relative prices to realign to signal sustainable production plans to entrepreneurs. These lessons provide a roadmap for other countries entering similar crises in the future