Was There a Sudden-Stop Warning for Iceland Prior to the 2008 Collapse?

In 2008, Iceland experienced the deepest and most rapid currency and banking crises recorded in modern peacetime history. The literature asserts that sudden stop episodes tend to precede such crises. Did Iceland experience any such warnings in advance of its collapse? In this study we use two alternative criteria to identify capital inflow reversals that constitute a sudden stop episode. We find varying degree of consistency between the two main criteria. We detect two repeated, and serial, sudden stop patterns (1996 - 2002 and 2004 - 2010), ending with a sharp capital net inflow reversal followed by a sharp currency depreciation. The former could have served as a warning sign of the elevated economic risks associated with excessive capital inflows and their subsequent termination. In hindsight, the sudden stop criteria provided useful warnings in Iceland’s case, particularly to include the repeated pattern detected