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Stabilizing Inflation in Iceland

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  • Keiko Honjo
  • Ben Hunt
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    Abstract

    This paper provides some empirical estimates on how tightly is it feasible to control inflation in a very small open economy such as Iceland. Estimated macroeconomic models of Canada, Iceland, New Zealand, the United Kingdom, and the United States are used to derive efficient monetary policy frontiers that trace out the locus of the lowest combinations of inflation and output variability that are achievable under a range of alternative monetary policy rules. These frontiers illustrate that inflation stabilization is more challenging in Iceland than in other industrial countries primarily because of the relative magnitudes of the economic shocks.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/262.

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    Length: 35
    Date of creation: 01 Nov 2006
    Date of revision:
    Handle: RePEc:imf:imfwpa:06/262

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    Related research

    Keywords: Economic models; inflation; monetary policy; central bank; aggregate demand; inflation targeting; real interest rate; monetary policy rules; coefficient on inflation; monetary authorities; monetary policy reaction function; rational expectations; rate of inflation; inflation targeting framework; monetary fund; inflation target; monetary policy regimes; price level; inflation-targeting; monetary authority; inflation equation; monetary regime; price stability; monetary policy reaction functions; monetary transmission mechanism; macroeconomic stability; nominal interest rate; real exchange rates; monetary policy framework; monetary policy instrument; inflation rates; measure of inflation; inflation performance; monetary transmission; high inflation;

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    References

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    1. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    2. Tetlow, Robert J. & von zur Muehlen, Peter, 2001. "Simplicity versus optimality: The choice of monetary policy rules when agents must learn," Journal of Economic Dynamics and Control, Elsevier, vol. 25(1-2), pages 245-279, January.
    3. Orphanides, Athanasios & Williams, John C., 2007. "Robust monetary policy with imperfect knowledge," Working Paper Series 0764, European Central Bank.
    4. Peter Isard & Douglas Laxton & Ann-Charlotte Eliasson, 1999. "Simple Monetary Policy Rules Under Model Uncertainty," International Tax and Public Finance, Springer, vol. 6(4), pages 537-577, November.
    5. Thomas A Lubik, 2005. "A Simple, Structural, and Empirical Model of the Antipodean Transmission Mechanism," Reserve Bank of New Zealand Discussion Paper Series DP2005/06, Reserve Bank of New Zealand.
    6. Jordi Galí & Tommaso Monacelli, 2004. "Monetary policy and exchange rate volatility in a small open economy," Economics Working Papers 835, Department of Economics and Business, Universitat Pompeu Fabra.
    7. Taylor, John B, 1979. "Estimation and Control of a Macroeconomic Model with Rational Expectations," Econometrica, Econometric Society, vol. 47(5), pages 1267-86, September.
    8. Athanasios Orphanides amd John Williams, 2001. "Monetary Policy with Imperfect Knowledge," Computing in Economics and Finance 2001 254, Society for Computational Economics.
    9. Drew, Aaron & Hunt, Benjamin, 2000. "Efficient simple policy rules and the implications of potential output uncertainty," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 143-160.
    10. Coletti, D. & Hunt, B. & Rose, D. & Tetlow, R., 1996. "The Bank of Canada's New Quarterly Projection Model. Part 3 , the Dynamic Model : QPM," Technical Reports 75, Bank of Canada.
    11. Richard Clarida & Jordi Gali & Mark Gertler, 1997. "Monetary Policy Rules in Practice: Some International Evidence," NBER Working Papers 6254, National Bureau of Economic Research, Inc.
    12. Laurence M. Ball, 1999. "Policy Rules for Open Economies," NBER Chapters, in: Monetary Policy Rules, pages 127-156 National Bureau of Economic Research, Inc.
    13. Andrew Levin & Volker Wieland & John C. Williams, 1998. "Robustness of Simple Monetary Policy Rules under Model Uncertainty," NBER Working Papers 6570, National Bureau of Economic Research, Inc.
    14. Frank Schorfheide, 2000. "Loss function-based evaluation of DSGE models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(6), pages 645-670.
    15. Douglas Laxton & Andrew Berg & Philippe D Karam, 2006. "Practical Model-Based Monetary Policy Analysis," IMF Working Papers 06/81, International Monetary Fund.
    16. 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.
    17. Ben Hunt & Peter Isard, 2003. "Some Implications for Monetary Policy of Uncertain Exchange Rate Pass-Through," IMF Working Papers 03/25, International Monetary Fund.
    18. F. Brayton & P. Tinsley, 1996. "A guide to FRB/US: a macroeconomic model of the United States," Finance and Economics Discussion Series 96-42, Board of Governors of the Federal Reserve System (U.S.).
    19. Philip Liu, 2006. "A Small New Keynesian Model of the New Zealand economy," Reserve Bank of New Zealand Discussion Paper Series DP2006/03, Reserve Bank of New Zealand.
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    Cited by:
    1. Carlos Garcia & Pablo Gonzalez & Antonio Moncado, 2010. "Proyecciones Macroeconómicas en Chile: Una Aproximación Bayesiana," ILADES-Georgetown University Working Papers inv262, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
    2. Carlos J. García & Pablo González M. & Antonio Moncado S., 2013. "Macroeconomic Forecasting in Chile: a Structural Bayesian Approach," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 16(1), pages 24-63, April.
    3. Keiko Honjo, 2007. "The Golden Rule and the Economic Cycles," IMF Working Papers 07/199, International Monetary Fund.

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