domestic monetary policy more effective and would hopefully reduce excess exchange rate volatility. furthermore, the risk to financial stability would be less, in part because domestic parties ’ currency - related risk would be lower and because it would be possible limit the size and growth of the banking system. to summarise, the possible reforms are as follows : • fiscal policy must support monetary policy more effectively. well - formulated fiscal rules could help in this context. • improved financial stability policy where prudential rules and other instruments are applied in order to reduce risk in the financial system as a whole and address the procyclical interactions between it and the real economy ( so - called macroprudential policy ). • intervention in the foreign exchange market with the aim of leaning against excessive capital inflows and mitigating the negative impact of capital outflows on financial system stability. such intervention would also be applied to smooth out excessive exchange rate volatility. • prudential rules after capital account liberalisation : - rules on domestic banks ’ foreign liquidity and foreign exchange balance aimed at reducing foreign exchange risk and foreign - denominated liquidity risk in domestic financial institutions, as well as making it more difficult for them to provide foreign - denominated loans to domestic borrowers without income in the borrowed currencies. - restrictions on deposit accumulation in foreign branches of domestic financial institutions. - a ban or other restrictions on foreign - denominated lending to borrowers without foreign - denominated income. - a temporary tax or reserve requirements to temper excessive capital inflows. bis central bankers ’ speeches • possible improvements to the monetary policy framework, including a longer target horizon for policy formation, which offers greater flexibility to take account of longer - term risks to price stability, including those due to financial stability risk. • changes to the financial system should also aim at improving monetary policy transmission. this option has the advantage that iceland retains monetary independence and a flexible exchange rate and can therefore respond to future idiosyncratic shocks. another advantage is that a domestic run on the treasury and / or solvent banks would be manageable. furthermore, there is reduced risk of financial instability due to excessive capital inflows and a subsequent run on the external funding of the banking system and the treasury. the disadvantages of this option lie in the fact that the possibilities for external trade without exchange rate risk will remain limited, and the domestic financial system will continue to be more expensive and less integrated with the global

picture of events, but in my memory it seems as though the economy was in a perpetual state of emergency : continuous income cuts, emergency legislation, index adjustments, and so forth. the words " chaos " and " disintegration " are the ones that come to mind. ever since i became governor of the central bank forty years later – in 2019 – it has been my goal to get beyond olafur's law, so to speak. by this i mean that i want iceland to build up a nominal interest rate system like that in other countries. there are many reasons why broad - based price indexation creates problems for monetary policy and for the financial system as a whole, but that discussion is too long for today. nevertheless, i would like to quote a report called nauðsyn eða val? [ necessity or choice? ], issued in 2012 by finance iceland, then known as the icelandic financial services association. i should also mention that i was one of the authors of the report. the part i wish to highlight reads as follows : 7 / 9 bis - central bankers'speeches " just as the passage of olafur's law ensured that no one profited anymore on inflation through negative real interest rates, and thereby created the political will to adopt realistic measures to bring inflation down, variable interest rates could raise the public consciousness about the cost of inflation, thus fostering an institutional commitment to price stability that has been sorely lacking in iceland. " this seems to me to be a prophecy that has come to pass. since mortgages with variable nominal interest rates became common in iceland after 2020, public discourse on inflation has undergone a sea change. the fight against inflation is now a societal priority, as can be seen in the discussions and framework for the most recent wage agreements, as well as in political discourse. this is what is referred to in the citation as an institutional commitment. that commitment has developed because with variable interest rates, inflation is paid up front. inflation comes to the fore in higher debt service, but at the same time, the loan principal declines quickly in real terms and the borrower builds up equity. this is what is meant by " raising consciousness about the cost of inflation. " the reverse is true with indexed loans, where debt service remains relatively stable but inflation is added to the principal, eroding the borrower's equity position. i also want to stress that while policy rate hikes have increased the debt service burden on non -