Statistical analysis of models of inflation in Iceland by

• Main Author: Gudmundur Gudmundsson
• Other Authors: The Pennsylvania State University CiteSeerX Archives
• Format: Text
• Language: English
• Subjects: Iceland
• Online Access: http://citeseerx.ist.psu.edu/viewdoc/summary?doi=10.1.1.523.3871; http://www.raunvis.hi.is/reports/2008/RH-13-2008.pdf

Models of Icelandic inflation with unit labour costs and import prices as independent variables explained more than 80 % of the variance of quarterly inflation values before 1990. After that, inflation and its variability decreased and such models explained less than 60 % of the observed variations. In the quarterly macroeconomic model of the Central Bank of Iceland, inflation is represented by a Phillips curve. The fit of this model after 1994 is similar to models relying only on unit labour costs and import prices. Inflation expectations are represented by the difference between the long-term interest rate and long-term indexed rate. The present investigation found no empirical evidence that this variable contains information, relevant for inflation forecasting, and the procedure used for forecasting the expectations is not supported by the data. The best fitting inflation model was a Phillips curve where inflation expectations were represented by two constant values, before and after a change in monetary policy 2001. Ágrip