Sunday, September 05, 2010

More On Iceland

While Iceland has long been a "poster child" for currency depreciation (But as I explained in the previous post, it is not something which anyone would want to emulate), and while that was until recently a fair characterization of the Icelandic economy, the Icelandic krona has recently rallied.

I am not sure why it has rallied so much recently (if anyone has a clue, then please e-mail me). But at any rate, the recent currency movements aren’t going to provide any relief. While it will raise the seriously depressed level of domestic purchasing power, it will also reduce net exports. And because of the extra exchange rate uncertainty, and the disruptiveness of large and unexpected changes, this introduces it isn't going to be a zero-sum game. It will instead cause a reduction in total output.