Iceland: Selected Issues

This Selected Issues paper focuses on assessing the monetary policy implications of changes in owner-occupied housing cost measurement. The paper introduces a new Iceland-specific Quarterly Projection Model called IceQMod. The model is used to assess the implication of a change in the methodology for calculating the cost of housing services received by homeowners in the consumer price index. IceQMod is a semistructural model gap model of the Icelandic economy. The change in methodology for measuring imputed rent could result in lower but more volatile inflation. The change in methodology may have implications for monetary policy moving forward. There may be an increased need to adopt macroprudential measures to manage excessive movements in house prices. By focusing on an inflation measure that was, until recently, significantly impacted by house price inflation, the Monetary Policy Committee was implicitly leaning against the wind on asset prices. Moving forward there may be a need to implement macroprudential measure more actively if increased fluctuations in house prices are viewed as a risk to financial stability, alongside other measures to address imbalances in the housing market.