<p>Here are some elements:</p>

<ul>
<li>Considering the two countries independently (like a closed economy), it depends on the <strong>real interest</strong> rate in the domestic country. If the inflation is zero in both countries, the real interest interest is probably higher in Iceland than in Sweden. To go deeper on this path, look at the <em>Taylor rule</em> which is a good proxy for the monetary policy followed in practice.</li>
<li>In an open economy, it depends also on the "confidence" foreign agents have in your currency. If they are afraid of a future inflation (so their returns will shrink) they "ask" for a better remuneration. For example the ECB had for years higher interest rate than the FED, and some argued the lack of confidence in the euro was one motive. The <em>interest rate parity</em> is the key word for deeper research.</li>
</ul>

CC BY-SA 3.0
2016-11-22T09:41:05.037Z
IMHO, OP question is a bad correlation-causation question.
mootmoot
CC BY-SA 3.0
2016-11-22T10:29:07.487Z
Maybe naively formulated... but in his question he gave all variables of the Taylor rules except the real interest rate. Not saying that the Taylor rule is a rule of thumb.
Yann
CC BY-SA 3.0
2016-11-21T22:19:16.683Z
2016-11-21T22:19:16.683Z
Yann
<p>Both countries have their own currencies, similar GDP growth and low inflation.  Yet Sweden has 0% central bank interest rates while Iceland has 5%.</p>

<p>Can someone explain?</p>

CC BY-SA 3.0
2016-11-14T12:21:59.137Z
What leads you to think that they would have the same interest rates?
410 gone
CC BY-SA 3.0
2016-11-14T17:17:16.067Z
Both with their own currency, similar GDP growth, similar GDP (per person), similar inflation.
Karlth
CC BY-SA 3.0
2016-11-14T19:49:24.733Z
That doesn't mean their economies are equal though of course. Maybe different investments are needed in each economy, or there's different risks in each country's markets. There are a lot of factors affecting an economy besides GDP and inflation.
Kitsune Cavalry
CC BY-SA 3.0
2016-11-21T16:49:17.913Z
What are the interest rates you are speaking about ? Central bank, Treasury bonds,... ?
Yann
CC BY-SA 3.0
2016-11-21T20:32:52.810Z
@YM'fr Central bank.
Karlth
<monetary-policy><interest-rate>
Why does Iceland have 5% interest but Sweden 0% interest with the same GDP growth?
Karlth
# Why does Iceland have 5% interest but Sweden 0% interest with the same GDP growth?

(Asked by: username_0 on 2016-11-14)

Both countries have their own currencies, similar GDP growth and low inflation. Yet Sweden has 0% central bank interest rates while Iceland has 5%.

Can someone explain?

**Tags:** monetary-policy, interest-rate
> **Comments:**
> **username_1**: What leads you to think that they would have the same interest rates?  
> **username_0**: Both with their own currency, similar GDP growth, similar GDP (per person), similar inflation.  
> **username_2**: That doesn't mean their economies are equal though of course. Maybe different investments are needed in each economy, or there's different risks in each country's markets. There are a lot of factors affecting an economy besides GDP and inflation.  
> **username_3**: What are the interest rates you are speaking about ? Central bank, Treasury bonds,... ?  
> **username_0**: @YM'fr Central bank.  

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## 1 answers

### Answer by username_3 on 2016-11-21. Score: 2 | Accepted answer

Here are some elements:

* Considering the two countries independently (like a closed economy), it depends on the **real interest** rate in the domestic country. If the inflation is zero in both countries, the real interest interest is probably higher in Iceland than in Sweden. To go deeper on this path, look at the *Taylor rule* which is a good proxy for the monetary policy followed in practice.
* In an open economy, it depends also on the "confidence" foreign agents have in your currency. If they are afraid of a future inflation (so their returns will shrink) they "ask" for a better remuneration. For example the ECB had for years higher interest rate than the FED, and some argued the lack of confidence in the euro was one motive. The *interest rate parity* is the key word for deeper research.

> **Comments:**
> **username_4**: IMHO, OP question is a bad correlation-causation question.  
> **username_3**: Maybe naively formulated... but in his question he gave all variables of the Taylor rules except the real interest rate. Not saying that the Taylor rule is a rule of thumb.  

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