benign in the period ahead than during the pre - pandemic period. the fiscal and monetary dimension of the response to pandemic and war three factors are likely to have determined the fiscal and monetary response of different countries to the pandemic : i ) fiscal and monetary space at the outset, ii ) the severity of the outbreak and iii ) structural factors that affected the economic impact of the outbreak and restrictions imposed to contain it. on the first two accounts, iceland was in a relatively good position. modest public debt gave the government significant fiscal space, and the outbreak and restrictive measures were moderate. the structure of the economy, on the other hand, with tourism - related services being the largest sector, created a large potential demand for fiscal accommodation to compensate affected firms and households, as discussed above. as in other countries, both fiscal and monetary policy were applied to respond to the pandemic with substantial easing, and the size of the fiscal measures taken were close to the average in oecd countries. fiscal measures in response to the pandemic iceland ’ s monetary space was also substantial, with domestic interest rates being significantly above zero at the outset of the pandemic. however, the size of iceland ’ s monetary space should not be overestimated. the combination of relatively illiquid currency markets, fairly strong exchange rate pass - through to prices and a long history of monetary instability limit how much the interest rate differential visa - vis abroad can narrow without a risk to inflation. nevertheless, the central bank of iceland ’ s policy rate was reduced to a historical low, greatly softening the blow to the domestic economy, especially the construction sector. as it turned out, the economy recovered very strongly as covid restrictions were lifted and the central bank needed to withdraw the monetary stimulus and start raising interest rates earlier and at a faster pace than most advanced countries. from accommodative to tightening policy reversing the stance of fiscal policy has been a more gradual process. as temporary support measures have expired, the fiscal stimulus has gradually petered out and, with the economy expanding faster than previously forecast, public finances have also recovered faster than expected. the accelerated pace of the economy provides an opportunity to reach a structurally adjusted fiscal balance at an earlier stage than expected. however, although the current fiscal policy framework may be relatively transparent and predictable, it does not seem to provide a sufficiently strong incentive to take advantage of unexpected fiscal windfalls in a counter - cyclical fashion. consequently, monetary

##banki, with kaupþing bank ltd. the new bank will be the largest commercial bank in iceland and one of the 10 largest in the nordic countries. the privatisation of the credit institutions has thus already created ample opportunities for rationalisation and will continue to do so in the period ahead. the reform of the financial legislation and its framework in line with that in other european states has facilitated the export of financial services by icelandic financial institutions and the establishment of operations abroad. you will hear more about this process from the next speaker, director sigurdur einarsson. foreign direct investment regulations are now liberal with the most important exception that such investment is not permitted in the fishing sector. foreign direct investment is most noticeable in power intensive industries, such as the production of aluminium, which is based on iceland ’ s abundance of renewable energy resources. recent changes in corporate taxation in iceland, lowering them to among the lowest to be found, serve to attract foreign business to iceland and encourage icelandic companies with international operations to favour iceland as the base of their operations. director garðar ingvarsson will probably give you more detail on this later this afternoon. direct investment by icelandic companies abroad has risen rapidly in recent years and in a variety of areas, such as fisheries and fish processing, pharmaceuticals, retail commerce and as mentioned earlier, financial services. these developments also benefit the icelandic economy in the long run as they integrate iceland further into the global economy, allow iceland to draw more easily on the experience of others and bring in dividends. during the 20th century, iceland tried almost every type of exchange rate policy, from a monetary union with denmark to a managed float. there were long periods when the icelandic krona was pegged against or managed with respect to the currency of some trading partner countries or a basket of currencies, with varying degree of adjustability and commitment. during the 1980´s the exchange rate regime had been relatively flexible. but in the first half of the 1990´s it became much more stable, after the krona was fixed in december 1989. exchange rate stability during this period was one of the cornerstones of the successful disinflation policy that took inflation in iceland down from double digits in the late 1980s to below 2 per cent around the middle of the 1990s. once the liberalisation of financial markets was more or less completed in the mid 1990´s, exchange rate flexibility was gradually increased. the margins around the exchange rate target were widened from 2¼ per cent in either