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Stabilizing Inflation in Iceland

  • Keiko Honjo
  • Ben Hunt
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    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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    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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    1. Orphanides, Athanasios & Williams, John C., 2007. "Robust monetary policy with imperfect knowledge," Journal of Monetary Economics, Elsevier, vol. 54(5), pages 1406-1435, July.
    2. Athanasios Orphanides amd John Williams, 2001. "Monetary Policy with Imperfect Knowledge," Computing in Economics and Finance 2001 254, Society for Computational Economics.
    3. Rudebusch, G.D. & Svensson, L.E.O., 1998. "Policy Rules for Inflation Targeting," Papers 637, Stockholm - International Economic Studies.
    4. Jordi Galí & Tommaso Monacelli, 2003. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Working Papers 11, Barcelona Graduate School of Economics.
    5. Andrew T.. Levin & Volker Wieland & John Williams, 1999. "Robustness of Simple Monetary Policy Rules under Model Uncertainty," NBER Chapters, in: Monetary Policy Rules, pages 263-318 National Bureau of Economic Research, Inc.
    6. Taylor, John B, 1979. "Estimation and Control of a Macroeconomic Model with Rational Expectations," Econometrica, Econometric Society, vol. 47(5), pages 1267-86, September.
    7. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," Working Papers 97-32, C.V. Starr Center for Applied Economics, New York University.
    8. Ann-Charlotte Eliasson & Peter Isard & Douglas Laxton, 1999. "Simple Monetary Policy Rules Under Model Uncertainty," IMF Working Papers 99/75, International Monetary Fund.
    9. Ben Hunt & Peter Isard, 2003. "Some Implications for Monetary Policy of Uncertain Exchange Rate Pass-Through," IMF Working Papers 03/25, International Monetary Fund.
    10. 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.
    11. 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.
    12. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    13. 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.
    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: A How-To Guide," IMF Working Papers 06/81, International Monetary Fund.
    16. Thomas Lubik, 2006. "A simple, structural, and empirical model of the antipodean transmission mechanism," New Zealand Economic Papers, Taylor & Francis Journals, vol. 40(2), pages 91-126.
    17. Laurence Ball, 1998. "Policy Rules for Open Economies," NBER Working Papers 6760, National Bureau of Economic Research, Inc.
    18. Robert J. Tetlow & Peter von zur Muehlen, 1999. "Simplicity versus optimality the choice of monetary policy rules when agents must learn," Finance and Economics Discussion Series 1999-10, Board of Governors of the Federal Reserve System (U.S.).
    19. Flint Brayton & Peter A. 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.).
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