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On our own? The Icelandic business cycle in an international context

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  • Bjarni G. Einarsson
  • Gudjón Emilsson
  • Svava J. Haraldsdóttir
  • Thórarinn G. Pétursson
  • Rósa B. Sveinsdóttir

Abstract

This paper analyses the properties of the Icelandic business cycle and whether it is synchronised with the business cycles of other developed countries. We start by identifying business cycle turning points and the average amplitude and duration of expansionary and contractionary periods in Iceland. We then extract the cyclical component of a large set of economic variables to document key stylised facts of the Icelandic business cycle. The resulting regularities of the domestic business cycle are also compared to business cycle regularities of other developed countries. Finally, we attempt to identify underlying structural shocks through long-run identification restrictions on a vector autoregressive (VAR) representation of the data, and look at the interconnection of these underlying shocks in Iceland and other developed countries. Our results suggest that although the characteristics of the domestic business cycle are in some aspects similar to business cycles in other developed countries, there are some important differences. Furthermore, our results indicate that the domestic business cycle is to a large extent asymmetric to the business cycle of other developed countries. These findings should be of importance for policymakers, and serve as a useful benchmark for modelling the Icelandic economy. The results should also serve as an important input for the analysis of the appropriate monetary and exchange rate regime for Iceland.

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Bibliographic Info

Paper provided by Department of Economics, Central bank of Iceland in its series Economics with number wp63.

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Date of creation: Mar 2013
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Handle: RePEc:ice:wpaper:wp63

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  1. Agresti, Anna Maria & Mojon, Benoît, 2001. "Some stylised facts on the euro area business cycle," Working Paper Series 0095, European Central Bank.
  2. Francis Breedon & Thórarinn G. Pétursson & Andrew K. Rose, 2011. "Exchange Rate Policy in Small Rich Economies," Economics wp53, Department of Economics, Central bank of Iceland.
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  7. Farrant, Katie & Peersman, Gert, 2006. "Is the Exchange Rate a Shock Absorber or a Source of Shocks? New Empirical Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 939-961, June.
  8. Laurence Ball & N. Gregory Mankiw, 1994. "A sticky-price manifesto," Proceedings, Federal Reserve Bank of Dallas, issue Apr.
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  10. Mario J. Crucini, 2006. "International Real Business Cycles," Vanderbilt University Department of Economics Working Papers 0617, Vanderbilt University Department of Economics.
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  17. Finn E. Kydland & Edward C. Prescott, 1990. "Business cycles: real facts and a monetary myth," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-18.
  18. Michael Funke, 2000. "Macroeconomic Shocks in Euroland vs the UK: Supply, Demand, or Nominal?," Quantitative Macroeconomics Working Papers 20001, Hamburg University, Department of Economics.
  19. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
  20. Sharon McCaw, 2007. "Stylised facts about New Zealand business cycles," Reserve Bank of New Zealand Discussion Paper Series DP2007/04, Reserve Bank of New Zealand.
  21. Baxter, Marianne, 1995. "International trade and business cycles," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 35, pages 1801-1864 Elsevier.
  22. Gerhard Bry & Charlotte Boschan, 1971. "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs," NBER Books, National Bureau of Economic Research, Inc, number bry_71-1, octubre-d.
  23. Bjarni G. Einarsson & Gudjón Emilsson & Svava J. Haraldsdóttir & Ólafur Ö. Klemensson & Thórarinn G. Pétursson & Rósa B. Sveinsdóttir, 2013. "The production and export structure of the Icelandic economy. An international comparison," Economics wp60, Department of Economics, Central bank of Iceland.
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Citations

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Cited by:
  1. Bjarni G. Einarsson & Gudjón Emilsson & Svava J. Haraldsdóttir & Ólafur Ö. Klemensson & Thórarinn G. Pétursson & Rósa B. Sveinsdóttir, 2013. "The production and export structure of the Icelandic economy. An international comparison," Economics wp60, Department of Economics, Central bank of Iceland.
  2. Bjarni G. Einarsson & Jósef Sigurdsson, 2013. "How "Natural" is the Natural Rate? Unemployment Hysteresis in Iceland," Economics wp64, Department of Economics, Central bank of Iceland.

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