Out of reach? Convergence to an inflation target in the Central Bank of Iceland’s macroeconomic model
Inflation scenarios in forecasts of the Central Bank of Iceland (CBI) appear to converge to the inflation target (2.5%) in 8-9 quarters. We ask whether this is a coincidence or an inherent property of the CBI’s model, QMM. We formulate a sub-model, containing equations for inflation, inflation expec...
Published in: | Tímarit um viðskipti og efnahagsmál |
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Viðskiptafræðideild og hagfræðideild Háskóla Íslands, viðskiptafræðideild Háskólans í Reykjavík og Seðlabanki Íslands.
2008
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Online Access: | https://hdl.handle.net/20.500.11815/208 https://doi.org/10.24122/tve.a.2008.6.2.9 |
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ftopinvisindi:oai:opinvisindi.is:20.500.11815/208 2024-09-15T18:13:57+00:00 Out of reach? Convergence to an inflation target in the Central Bank of Iceland’s macroeconomic model Baldursson, Friðrik Már Hall, Axel Viðskiptadeild (HR) School of Business (RU) Háskólinn í Reykjavík Reykjavik University 2008 83-106 https://hdl.handle.net/20.500.11815/208 https://doi.org/10.24122/tve.a.2008.6.2.9 en eng Viðskiptafræðideild og hagfræðideild Háskóla Íslands, viðskiptafræðideild Háskólans í Reykjavík og Seðlabanki Íslands. Tímarit um viðskipti og efnahagsmál;6(2) http://www.efnahagsmal.is/article/view/a.2008.6.2.9 doi:10.24122/tve.a.2008.6.2.9 Friðrik Már Baldursson; Axel Hall. (2008). Out of reach? Convergence to an inflation target in the Central Bank of Iceland’s macroeconomic model. Tímarit um viðskipti og efnahagsmál, 6(2), 83-106. Doi:doi.org/10.24122/tve.a.2008.6.2.9 1670-4444 1670-4851 (e-ISSN) https://hdl.handle.net/20.500.11815/208 Research in applied business and economics info:eu-repo/semantics/openAccess Verðbólga Seðlabankar Þjóðhagsspár info:eu-repo/semantics/article 2008 ftopinvisindi https://doi.org/20.500.11815/20810.24122/tve.a.2008.6.2.9 2024-07-09T03:01:56Z Inflation scenarios in forecasts of the Central Bank of Iceland (CBI) appear to converge to the inflation target (2.5%) in 8-9 quarters. We ask whether this is a coincidence or an inherent property of the CBI’s model, QMM. We formulate a sub-model, containing equations for inflation, inflation expectations, wages, exchange rate and the policy interest rate. We find that rapid convergence toward the inflation target is a property of the QMM when a Taylor-rule is included in the model. Underlying is an inflation expectations equation which assumes a high degree of credibility of the CBI. This equation, however, lacks empirical underpinnings. When we replace the QMM expectations equation with an estimated equation, a more realistic picture emerges where the Central Bank has to raise the policy rate considerably higher than in QMM scenarios and it takes much longer to reach the inflation target. Peer Reviewed Ritrýnt tímarit Article in Journal/Newspaper Iceland Opin vísindi (Iceland) Tímarit um viðskipti og efnahagsmál 6 2 83 |
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Open Polar |
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Opin vísindi (Iceland) |
op_collection_id |
ftopinvisindi |
language |
English |
topic |
Verðbólga Seðlabankar Þjóðhagsspár |
spellingShingle |
Verðbólga Seðlabankar Þjóðhagsspár Baldursson, Friðrik Már Hall, Axel Out of reach? Convergence to an inflation target in the Central Bank of Iceland’s macroeconomic model |
topic_facet |
Verðbólga Seðlabankar Þjóðhagsspár |
description |
Inflation scenarios in forecasts of the Central Bank of Iceland (CBI) appear to converge to the inflation target (2.5%) in 8-9 quarters. We ask whether this is a coincidence or an inherent property of the CBI’s model, QMM. We formulate a sub-model, containing equations for inflation, inflation expectations, wages, exchange rate and the policy interest rate. We find that rapid convergence toward the inflation target is a property of the QMM when a Taylor-rule is included in the model. Underlying is an inflation expectations equation which assumes a high degree of credibility of the CBI. This equation, however, lacks empirical underpinnings. When we replace the QMM expectations equation with an estimated equation, a more realistic picture emerges where the Central Bank has to raise the policy rate considerably higher than in QMM scenarios and it takes much longer to reach the inflation target. Peer Reviewed Ritrýnt tímarit |
author2 |
Viðskiptadeild (HR) School of Business (RU) Háskólinn í Reykjavík Reykjavik University |
format |
Article in Journal/Newspaper |
author |
Baldursson, Friðrik Már Hall, Axel |
author_facet |
Baldursson, Friðrik Már Hall, Axel |
author_sort |
Baldursson, Friðrik Már |
title |
Out of reach? Convergence to an inflation target in the Central Bank of Iceland’s macroeconomic model |
title_short |
Out of reach? Convergence to an inflation target in the Central Bank of Iceland’s macroeconomic model |
title_full |
Out of reach? Convergence to an inflation target in the Central Bank of Iceland’s macroeconomic model |
title_fullStr |
Out of reach? Convergence to an inflation target in the Central Bank of Iceland’s macroeconomic model |
title_full_unstemmed |
Out of reach? Convergence to an inflation target in the Central Bank of Iceland’s macroeconomic model |
title_sort |
out of reach? convergence to an inflation target in the central bank of iceland’s macroeconomic model |
publisher |
Viðskiptafræðideild og hagfræðideild Háskóla Íslands, viðskiptafræðideild Háskólans í Reykjavík og Seðlabanki Íslands. |
publishDate |
2008 |
url |
https://hdl.handle.net/20.500.11815/208 https://doi.org/10.24122/tve.a.2008.6.2.9 |
genre |
Iceland |
genre_facet |
Iceland |
op_relation |
Tímarit um viðskipti og efnahagsmál;6(2) http://www.efnahagsmal.is/article/view/a.2008.6.2.9 doi:10.24122/tve.a.2008.6.2.9 Friðrik Már Baldursson; Axel Hall. (2008). Out of reach? Convergence to an inflation target in the Central Bank of Iceland’s macroeconomic model. Tímarit um viðskipti og efnahagsmál, 6(2), 83-106. Doi:doi.org/10.24122/tve.a.2008.6.2.9 1670-4444 1670-4851 (e-ISSN) https://hdl.handle.net/20.500.11815/208 Research in applied business and economics |
op_rights |
info:eu-repo/semantics/openAccess |
op_doi |
https://doi.org/20.500.11815/20810.24122/tve.a.2008.6.2.9 |
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Tímarit um viðskipti og efnahagsmál |
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