Baldursson, Fridrik M. and Hall, Axel (2008): Out of reach? Convergence to an inflation target in the Central Bank of Iceland's macroeconomic model. Published in: Timarit um vidskipti og efnahagsmal No. Special issue 2008 : pp. 83-106.
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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.
|Item Type:||MPRA Paper|
|Original Title:||Out of reach? Convergence to an inflation target in the Central Bank of Iceland's macroeconomic model|
|Keywords:||Inflation targeting, inflation forecasts, inflation expectations, macroeconomic models, credibility|
|Subjects:||E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E27 - Forecasting and Simulation: Models and Applications
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
|Depositing User:||Fridrik Baldursson|
|Date Deposited:||11. Mar 2009 02:08|
|Last Modified:||08. Feb 2015 04:37|
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