Kinesis monetary system will solve the ISK devaluations.
Banks’ expansion of the money supply has led to inflation and devaluations of the ISK. When the economic outlook is positive, banks acting to maximize profit will lend more (so the money supply grows at a faster rate) but when the economy is doing badly, banks’ lending slows down (so the money supply grows at a slower rate, or even starts to contract).
This lending behavior amplifies the economic cycle. In the expansionary years of 2003 to 2006, the Central Bank of Iceland raised the policy rate (the base rate of interest) and warned that the economy was overheating.
However, this did not prevent the banks from over expanding the money supply. For decades, commercial banks in Iceland have expanded the money supply much faster than was required to support economic growth in Iceland.
In the twenty years from 1986 to 2006, GDP grew on average by 3.2% per annum. In the same period banks expanded the money supply by an average of 18.6% per annum.
Expanding the supply of ISK six times faster than was needed for economic growth was a leading cause of inflation and devaluation of the ISK.
In an effort to curb lending, the Central Bank of Iceland increased its policy rates from 5.6% in 2004 to 18.0% in 2008. Raising the policy rate was largely ineffective in restricting money creation by the banks, and also had the unwanted side effect of creating a surge in demand for ISK by foreign investors.
This demand served to delay the inevitable devaluation of the ISK. In 2008 reality caught up with the ISK and the exchange rate fell by 50% against the USD.
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