birgir isleifur gunnarsson : interaction of monetary and financial stability in small open economies welcoming address by mr birgir isleifur gunnarsson, chairman of the board of governors of the central bank of iceland, at the suerf seminar, reykjavik, 3 june 2004. * * * ladies and gentleman on behalf of the central bank of iceland, i warmly welcome you to this seminar on the interaction of monetary and financial stability in small open economies. it is an honour for us to co - sponsor the seminar with suerf. we are grateful to david llewellyn, eduard hochreiter, beatrix krones and micheal bailey at suerf for the excellent cooperation which we have enjoyed with them in its preparation. the topic of the seminar is an appropriate one which is attracting increasing attention, both within and outside central banks. i trust that the presentations and discussions over the next two days will leave us with a better understanding of this interaction and of the issues on which we wish to focus our attention in the period ahead. we will be assisted by very impressive speakers and participants. i wish to extend my gratitude to those who have agreed to give lectures and present papers and i look forward to inspiring and stimulating contributions by them. in this address, i will briefly describe our own recent experience in the areas of monetary and financial stability. the current act on the central bank of iceland was adopted in 2001. it assigned to the central bank the main objective of pursuing price stability. the bank was granted instrument independence to pursue that main objective, its financial independence was enhanced and the act included clear provisions on transparency and accountability. the act also stated that the bank should promote an efficient and safe financial system, including payments systems domestically and with foreign countries. in addition to price stability, the bank was, in other words, given a clear mandate to concern itself with financial stability. an inflation targeting framework was adopted at practically the same time with a joint declaration of the government and the central bank which set a target for inflation of a 2½ % twelve - month rise in the cpi. the framework imposes strong demands on the professional capacity of the central bank. the bank regularly publishes a macroeconomic forecast and inflation forecast, with an associated inflation report. the inflation forecast provides the foundation for the inflation targeting policy. in its quarterly monetary bulletin, the bank publishes a detailed analysis of current economic and monetary developments and prospects. it also presents the rationale behind the decisions by the board of governors to

other and benefit from close cooperation among the staff. both areas have forced us to put our analyses, projections and policies on a longer - term perspective which provides an opportunity for better overall economic and monetary policy management. although much remains to be explained about the nature of the interaction of monetary and financial stability, i mentioned earlier that a sound financial system is a precondition for economic and monetary stability and the implementation of an effective monetary policy. in this respect, these areas support each other. since financial liberalisation was introduced, we have not faced circumstances where financial stability concerns have directly affected or conflicted with monetary policy decisions. our aim is to prevent such a situation from arising. the potential risks to financial stability at the end of the last upswing were defused by the swift achievement of monetary stability and the restoration of internal and external balance. in conclusion, i would like to repeat my warm welcome to all the participants in the seminar. i trust that both the seminar and your stay in iceland will be interesting and rewarding, professionally and socially.