Journal of Applied Finance & Banking

Iceland’s Currency Options

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• Abstract

  This paper employs cointegration techniques to determine the degree of convergence of Iceland’s nominal interest rates and inflation rates with that of Canada and the Euro area. Nominal interest rates are used here as an indicator of financial market integration and inflation rates, a measure of monetary policy integration. The degree of convergence of Iceland’s inflation and nominal interest rates with the United States is also studied for comparison. The result of the test provides evidence in support of inflation rate convergence between Iceland and the Euro area. It also shows nominal interest rate convergence among all four countries. This result would contribute to the discussion on whether Iceland should join the European Union and European Monetary Union or adopt the Canadian dollar in a formal currency union, if it chooses to abandon its currency.