Stabilizing Inflation in Iceland, Issues 2006-2262
International Monetary Fund, European Department, 2006 - Anti-inflationary policies - 35 pages
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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0.20 inverse gamma 2005Q3 Parameter Prior aggregate demand Bank's Beta Canada Central Bank coefficient on inflation coefficient on ygap countercyclical fiscal policy countercyclical fiscal stance deviation f deviation measurement error deviation of inflation dislike for interest Distribution Posterior Mean efficient frontiers efficient monetary policy efficient policy frontiers endogenous fiscal policy equilibrium value error ygap 0.20 Exchange rate variability fis coefficient fiscal balance foreign sector GDP and Potential improve the inflation-output inflation gap inflation targeting countries inflation targeting framework inflation-output variability trade-off interest rate variability lag inygap loss function Mean Distribution Posterior measurement error ygap monetary authorities Monetary Bulletin monetary policy frontier monetary policy reaction output gap Parameter Prior Mean policy reaction function policy rules Posterior Mean Domestic potential output prior distributions Prior Mean Distribution rational expectations real exchange rate real interest rate standard deviation measurement stochastic error process target rate tolerance range tolerance-range breaches United Kingdom ygap 0.20 inverse ygap,_x Zealand zgap