to respond by matching it with an investment of its own on the same scale. the inflow of capital was enormous. as if this was not enough, public sector involvement in housing finance was reformed around the same time ; this structural reorganisation had unexpected multiplier effects when the recently privatised commercial banks eagerly followed that lead and ran ahead along the same path even faster than the policy makers had expected. at the same time, icelandic banks and financial institutions have been establishing their influence in neighbouring foreign markets and, to some degree, more distant ones. the banks have expanded rapidly and are now very large relative to iceland ’ s domestic economy, and in fact by any measure. their international activities have also created a new situation that has sometimes been called “ the problem of explaining the icelandic economy ”. although i feel that this problem is overstated because it must surely be temporary, it cannot be denied that the icelandic currency itself, and its small size, are recurrent themes. the economic factors i mentioned earlier have driven strong inflationary pressures in iceland, which have partly appeared in the form of higher measured inflation, but have to some extent been contained by central bank policy rate decisions, which in turn have affected the exchange rate of the icelandic krona, at least for some while now. and in combination, these two factors have raised yet another question that is relevant to this conference. that is to say, these special conditions have inspired new investors, the carry traders, to venture to our shores. these modern - day vikings try their fortune in distant places in the hope of quick gain and handsome returns, which they can no longer find closer to home. what will happen when these bold hunters of yields and expectations suddenly lose their nerve? or their appetite? regardless of whether this is caused by events that have occurred somewhere else and under completely different conditions from here, or due to persistent rumours, speculation and theories about the situation in iceland and risks that have little or no foundation at that time. will they load everything aboard and sail off, like the vikings in the past, with what they have managed to gather up, and look for shelter with their bounty against real or imaginary threats? if this happens, might the high - yield countries suffer a shock? and if so, will that shock be felt the most by the smallest countries, where investors naturally have the least knowledge and confidence? then the question will arise about the impact that all this will have on the effectiveness of the central bank ’ s policies for controlling

order to increase the central bank ’ s profits in the short - term. the monetary policy framework i would now like to turn to two related topics : the pros and cons of independent monetary policy, on the one hand, and possible changes to the monetary policy framework and implementation, on the other. i must be brief because the clock is ticking, but i am more than willing to answer questions about this and other points later on. “ is independent monetary policy too costly? ” is the topic of this meeting. presumably, the question implied is whether the benefits of such monetary policy are outweighed by the costs. to my mind, this question can hardly be answered without reference to the various options available because we must have some sort of currency regime, and all of them have pros and cons. if there is a currency union, it is the monetary policy of the union ’ s central bank that carries the day. in the case of the eurozone, that is the european central bank. the pros and cons of such cooperation were outlined in detail in a report published by the central bank in autumn 2012, and i do not have time to cover them here. 1 if we continue with our own currency, the question of exchange rate policy arises : should the krona be pegged against one currency or a basket of currencies, should it float freely, or should it be somewhere in between? if the exchange rate is pegged, it is not possible to apply monetary policy to mitigate economic fluctuations by responding to shocks. the adjustment will therefore take place more through fluctuations in employment and output and less through fluctuations in real wages than is the case with independent monetary policy and a flexible exchange rate. what do we want in this context? a good stylised example of how independent monetary policy and a flexible exchange rate could mitigate the impact of shocks on employment and output can be found in the most recent issue of monetary bulletin, which describes what would happen if the past few years ’ improvement in terms of trade should reverse with http : / / www. cb. is / publications - news - and - speeches / publications / special - publications / specialpublication - 7 / a reduction in marine product prices. 2 there are many things to consider in this respect. experience shows that in small, open economies with unrestricted capital flows and a freefloating currency, the exchange rate has a tendency to fluctuate excessively and irregularly, with possible