it is less of a puzzle than wage developments in industrialised countries overall : global trends have been favourable to them, as can be seen in improved terms of trade and rising exchange rates. it is well known that this can create conditions where strong gdp growth and sizeable pay rises can coincide for a time with low inflation. and one difference between iceland and many other industrialised economies is that in other countries there have been concerns that inflation expectations would fall too steeply and become anchored below target. in order to place iceland in this context, let us look at chart 4, which gives some relevant metrics for several small and medium - sized inflation - targeting countries. chart 4 in this context, some of the discussion has centred on the extent to which low inflation is a problem if it is paired with robust gdp growth and full capacity utilisation, particularly if these are a result of positive supply shocks. in that case, perhaps the problem lies in how the inflation target is presented and understood. this will call for more flexibility and a longer horizon for the target, which was one of the proposals explored in the central bank ’ s 2010 report on monetary policy in post - capital controls iceland. 1 monetary policy milestones i mentioned earlier the success we have had with monetary policy – success that was visible a year ago and is even more obvious now. this past september, the central bank of iceland issued a special publication entitled monetary policy based on inflation targeting : experience since 2001 and postcrisis changes. 2 in addition to discussing the topics in the title, the report maps out this success with monetary policy. chart 5 shows what that entails : inflation expectations are at target, unexpected changes in inflation that strongly affected short - and long - term inflation expectations in the past no longer do so, and movements in the exchange rate of the krona function much more as shock absorbers and less as sources of shocks than they used to. in short, monetary policy with a flexible exchange rate is much more successful now than it had been before 2012, when the bank published its report entitled iceland ’ s currency and exchange rate policy options. 3 chart 5 special publication no. 4, monetary policy in iceland after capital controls. report from the central bank of iceland to the minister of economic affairs, december 2010 : https : / / www. sedlabanki. is / library / skraarsafn / serrit / peningastefnan _ eftir _ hoft. pdf special publication no

has previously been noted, exchange rate movements have been more effective as shock absorbers in recent years than they were previously. although more effective and more credible monetary policy plays a part in this, what is probably more important is that the capital controls – and now, the capital flow management measure – have mitigated volatile capital flows, which can undermine economic stability, as experience has shown. chart 7 chart 8 review of the monetary policy framework and currency and exchange rate policy options in closing, i would like to focus on the ongoing review of iceland ’ s monetary policy framework and currency and exchange rate policy options. in the recent past, i have emphasised how important it is that this discussion should take into account what monetary policy can and cannot do. in the long run, monetary policy can deliver price stability, and in the short run it can also mitigate the effects of shocks and reduce fluctuations in output and employment. but monetary policy cannot have a long - term impact on the real exchange rate. as such, it can do little to mitigate the crowding - out effect of strong growth in a new export sector. if it tried to, the effect would be only temporary, and it would come at the expense of sacrificing the objectives with which monetary policy has been entrusted – objectives that it can achieve. industrial and fiscal policies can have such a real impact over the long term, however, and it is to them that concerned parties should turn. but it is possible to choose from among various options on the spectrum between a rigid peg and a free - floating exchange rate. and it is possible to adopt another currency, either unilaterally or in bilateral or multilateral cooperation. these were the options explored in the central bank ’ s 2012 report. 4 the conclusion was that a unilateral peg with unrestricted capital flows could run aground, as it did in so many economies after capital movements were liberalised further in the 1980s and 1990s. a firmer peg such as a currency board could pose risks to financial stability, and the same was considered true of unilateral adoption of another currency. it was deemed highly uncertain – and actually unlikely – that bilateral adoption of another currency would be on offer anywhere. that left two possibilities : joining the eurozone after a negotiated agreement and continuing with a flexible exchange rate and an inflation target. the problem was that there were drawbacks to both. the financial crisis had uncovered flaws in the design of the eurozone, and it also