Government must respect market forces says professor of economics Skip to content

Government must respect market forces says professor of economics

In today’s paper, Fréttabladid interviews Gylfi Zoega, professor of economics at the University of Iceland.

Gylfi predicts that interest rates will keep rising globally over the next few months, and inflation, too. Equities will probably decline, both in Iceland and abroad. This development will increase the pressure on the króna and make management of the Icelandic economy “more difficult”.

Gylfi says that the government has “not managed the economy sufficiently well” over the past few years in spite of privatisations and increased relative power of the private sector compared to the government. Market-based economies are cyclical, and some cycles are bigger than others. “The politicians have not adapted,” says Gylfi, “government must pursue economic policy that is more respectful of the laws of the market economy.”

The Central Bank has fought the battle against inflation on its own, says Gylfi. By raising interest rates the Central Bank has channeled Icelandic consumption abroad and contributed to the current account deficit. The size of the deficit calls into question the bank’s ability to perform its task. It will be difficult to “talk the inflation down”, says Gylfi, if there are no additional, concurrent measures to reduce demand. The bank should have raised rates sooner and pressured the commercial banks to clamp down on lending, and the government should have temporarily increased income tax to reduce demand.

Only by coordinating the actions of the government and the Central Bank, in cooperation with the parties of labour market, can a crash of the króna be prevented and [the consequent] inflation which would threaten the finances of indebted households and companies and thereby the stability of the financial system.

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