ABSTRACTThe economic collapses of Iceland and Ireland after 2008 are the most severe inthe developed world in recent history. This paper assesses five key differences inthe causes of and responses to each country’s crisis. On the causal side, we look at(1) the role that deposit insurance served in artificially increasing risk-adjustedreturns and (2) the subsequent increase in loanable funds that bred large andunsustainable financial sectors. On the response side we look at (1) the speed,transparency, and effectiveness of the nationalization of each country’s financialsector; (2) the decision whether to bail out key financial institutions or to allowthem to fail; and (3) the differences in exchange-rate structures that createddifferent recovery paths. We conclude by drawing policy conclusions for countrieswith large, unstable banking sectors, notably the United States.
codes: E00, E32KEYWORDSIceland, Ireland, fiscal policy, monetary policy, central bank, deposit insurance, bailoutABOUT THE AUTHOR David Howden is an associate professor of economics at St. Louis University at itscampus in Madrid, Spain. With Philipp Bagus, he is co-author of
Deep Freeze: Iceland’s Economic Collapse,
which asses the causes and consequences of theIcelandic crisis of 2008. firstname.lastname@example.orgAcknowledgmentsI would like to thank Devin Bowen for excellent research assistance.