debt onto a stronger footing and building up domestically financed foreign reserves. economic policy and economic incentives would then have to take into account the task of of improving the outlook for the current account balance. inflation has been below the inflation target for nine consecutive months. this is the secondlongest such period since the inflation target was adopted in march 2001, the longest being a twelve - month period from november 2002 through october 2003. but it is not inconceivable that we might break that record, as the bank ’ s forecast, published yesterday, entails that inflation will remain below target through the early months of 2015. inflation below target is not more desirable than inflation above target, though. in this context, we mustn ’ t fall into the trap of expecting monetary policy instruments to be so strong and quick - acting that inflation will always measure 2. 5 %, no matter what shocks hit the economy. the main objective is to keep average inflation close enough to the target over a long period of time that the target itself provides an anchor for inflation expectations and the many decisions that require an estimate of future inflation. but how close is close enough? in this context, our so - called tolerance limits for the inflation target – namely, 1 % and 4 % – are too wide, and it is worth noting that those limits are merely the trigger for the submittal of a report to the government explaining how inflation will be bis central bankers ’ speeches brought back to target. in short, then, the inflation target is not 1 – 4 %. in order to underline the control problem, i sometimes say that the inflation target is not 2. 5 % but 2½ %. what this means is that, if we think in whole and half percentage points, a deviation of half a percentage point or less from target would be considered within the boundaries of targetlevel inflation. by that criterion, inflation as projected in the bank ’ s forecast will be at target for the entire forecast horizon through end - 2017, apart for the last quarter of 2015 and the first quarter of 2016. according to the forecast, inflation will average 2. 6 % during the period 2014 – 17 and will therefore be at the 2½ % target. if this materialises, it is hard to call it anything other than an acceptable performance. it is naturally less of a concern if inflation deviates temporarily from target if inflation expectations do not deviate in the same direction. early this year, inflation expectations were above target even though

mar guðmundsson : the icelandic pension system and the financial crisis speech by mr mar guðmundsson, governor of the central bank of iceland, at the opening dinner of the european pension convention 2010, reykjavik, 2 may 2010. * * * chairman, ladies and gentlemen, it gives me great pleasure to address you here tonight, and i would like to thank the organisers for inviting me to do so. this is due not least to my past interest in and work on the icelandic pension system and, more generally, my interest in the optimal design of pension systems. during my tenure as chief economist of the central bank of iceland from 1994 – 2004, i was convinced that the pension system that had developed in iceland, partly by historical accident, was one of the strengths of iceland ’ s economy. this conviction had taken root earlier, when i was involved with pension reform and served for a while as the chairman of the board of a pension fund that has long been among the top ten in iceland in terms of size. however, this view was reinforced around the turn of the century, when i made an in - depth study of the icelandic pension system and tried to analyse its effects on the economy and the financial sector. 1 i subsequently tried to propagate the virtues of the system abroad. i remember that the last thing i did in this respect, before i went to the bank for international settlements in basel to focus on other things, was to try to sell the system to a russian audience that was considering pension reform in their own country. 2 on what was this view based? in order to answer that, i must first remind us of the attributes of a good pension system. of course it is obvious that it must be a mechanism for saving for retirement. but in order to be an efficient such mechanism, it must take due account of the lifetime risks facing individuals, as well as the economic and financial risks facing society as a whole. these are, for instance, risks related to life expectancy, ability to work, demographics, the productivity of labour, and the rate of return on financial assets. furthermore, some at least would make the demand that the system have a certain degree of income equalisation built into it, and most would accept that it should at least not be regressive. then we would want the pension system to have some degree of flexibility and to provide scope for individual choice. finally, we want the pension system to be designed so as to promote economic