Már Guðmundsson: Reforming the international monetary and financial system and preserving monetary and financial stability in financially integrated small and open economies

Panel comments by Mr Már Guðmundsson, Governor of the Central Bank of Iceland, at the 50th Anniversary Conference of the Central Bank of Malta, Valletta, 4 May 2018.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Let me begin by congratulating all at the Central Bank of Malta on the Bank's 50th anniversary and thank Governor Vella for the invitation to speak at this conference. I spoke in a Central Bank of Malta conference here in Valetta around the middle of the 1990s. At that time Iceland had more or less fully liberalised its capital account and had a pegged exchange rate. Malta also had a pegged exchange rate but still had some capital controls. The world has changed since then and our understanding of it even more. We in Iceland went towards a flexible exchange rate and inflation targeting, while you entered monetary union. Overall, we have both done well, but our road in Iceland has been bumpier.

The heading of this panel is Challenges facing central banks after the financial crisis. That is a big menu. For my introductory remarks I choose two related issues that have been high on my mind for years, both as a policy maker in a small, open and financially integrated economy and during my tenure at the BIS. These are potential reforms to the international monetary and financial system (IMFS) and how small, open and financially integrated economies (SOFIEs) can preserve monetary and financial stability in a world of global financial integration and large and volatile capital flows. Both of these are unfinished business and the road ahead is foggy.

The post-war global economic order was initially based on the principles of free trade in goods, current account convertibility, and monetary stability through fixed but adjustable exchange rates vis-à-vis the US dollar. Open capital accounts were the exception, however. At the time, trade integration was seen to be more important for economic progress than financial integration.