Revised currency baskets 2006
As of December 1, 2006, a new method has been introduced for calculating the effective exchange rate indices published by the Central Bank of Iceland. It is planned to cease updating of the currency basket that has hitherto been used to calculate the official exchange rate index and discontinue publication of this index at the end of 2008. A number of new effective exchange rate indices have been calculated. The weights differ considerably from those used for calculation of the official exchange rate index. In particular, the weight of the US dollar has been reduced. The baskets used to calculate the new indices are based on Iceland’s foreign trade over the preceding year and will be updated annually every September. The following tables show the new baskets based on foreign trade in 2005 and changes from previous baskets.
Publication of the current official exchange rate index will be discontinued. However, it will continue to be calculated until the end of 2008 on the basis of the current basket, which took effect in July 2005.
The main purpose of the change is to allow the baskets to reflect as closely as possible the composition of Iceland’s foreign trade in both goods and services, by increasing the number of component currencies. Calculation of the baskets has been simplified and made more systematic, and also brought more closely into line with established international practice. The reasons behind the changed methodology for calculating the exchange rate indices are described in Monetary Bulletin 2006/2. Four types of index are now calculated. Two are based on merchandise trade and contain different numbers of currencies, while the other two include the tourism sector. The baskets used for calculating the indices are as follows:
A. Narrow merchandise basket: Calculated from merchandise trade with all countries with a weight of at least 1% in Iceland’s merchandise trade over the past three years.
B. Broad merchandise basket: Calculated from merchandise trade with all countries with a weight of at least 0.5% in Iceland’s merchandise trade over the past three years.
C. Narrow trade basket: The same as A, except that it takes into account the relative share of tourism in services trade. The distribution of tourism revenues is estimated from travellers’ nights of accommodation by country of origin, and expenditures from a geographical breakdown of credit card expenditure by Icelanders abroad.
D. Broad trade basket: The same as B, except that it takes into account the relative share of tourism as in C.
Trade with countries not fulfilling the above conditions for a 0.5% share of total trade in the broader baskets or 1% in the narrow baskets is zero-rated. The criterion for inclusion is three-year average merchandise trade volume. This prevents the need for repeatedly including new currencies in the baskets and removing others due to annual fluctuations in trade. No adjustment is made for third-market effects.
The tables showing the new baskets and the changes from the previous baskets can be found here:
Currency baskets 2006 (Pdf file)
The new merchandise trade indices have been calculated retrospectively to 1995 and new services trade indices to 1999 and these time series are accessible on the Central Bank of Iceland website.
For further information, contact the Economics and Monetary Policy, tel. +354 569-9600.