Central Bank of Iceland economic forecasts
Forward-looking monetary policy is the foundation for the Bank’s achievement of price stability, one of its principal objectives. In order for monetary policy to be forward-looking and able to respond to likely near-term developments, the Central Bank must be able to assess the short- and long-term economic outlook and the key risks and uncertainties that could affect it. Four times a year, the Central Bank prepares forecasts for the real economy and inflation covering a forecast horizon of three years. The forecasts, which are based on an in-depth analysis of the state of the domestic economy and the current economic outlook, are published in the Bank’s Monetary Bulletin.
Inflation forecastThe Central Bank’s macroeconomic and inflation forecasts perform an important function in monetary policy conduct. In assessing the inflation outlook, the Bank uses its quarterly macroeconomic model (QMM). According to the model, the inflation outlook is determined by developments in imported inflation, unit labour costs, the output gap in the domestic economy, and expected future inflation. The Bank also makes use of simple time series models and expert assessments of the short-term inflation outlook.
The chart shows the Central Bank’s most recent inflation forecast, together with the confidence intervals.
The Central Bank also publishes forecasts of developments in a range of other economic variables. The national accounts are the primary source of data on the domestic economy. In addition, Bank staff prepare an independent assessment of the state of the economy through statistical analysis of developments in key variables, with reference to high-frequency indicators; surveys; and discussions with corporate executives, institutional directors, and labour market institutes. The Central Bank’s quarterly macroeconomic model (QMM) is the tool used to manage this information.
The chart below shows the Central Bank’s most recent GDP growth forecast.
Quarterly macroeconomic model (QMM)
To pursue forward-looking monetary policy, a central bank needs models that enable it to assess the economic and inflation outlook. A considerable portion of the research taking place within the Bank is devoted to this task. The Bank’s quarterly macroeconomic model, referred to as QMM, was brought into use in 2006. Prior to the development of QMM, Bank staff relied primarily on an annual model, which was inadequate for analysis of short-term developments in economic variables.
Alongside QMM, the Bank also uses its dynamic stochastic general equilibrium model, called the Dynamic Icelandic Model, or DYNIMO, which is considered more suitable for economic policy simulations.
Box in Monetary Bulletin 2015/4: Updated Central Bank of Iceland macroeconomic model.
Box in Monetary Bulletin 2015/4: Assumptions concerning wage developments in Central Bank forecasts.
Symposium on improvements to QMM, 10 February 2009.
Appendix 1 in Monetary Bulletin 2006/3, pp. 57-60: The transmission mechanism of monetary policy in the Central Bank’s quarterly macroeconomic model.
Appendix 1 in Monetary Bulletin 2006/1: New quarterly macroeconomic model.
Box in Monetary Bulletin 2006/1: Central Bank inflation forecasting methods.
- Box 5 in Monetary Bulletin 2015/4: Updated Central Bank of Iceland macroeconomic model
- Box 4 in Monetary Bulletin 2015/4: Assumptions concerning wage developments in Central Bank forecasts
- Revision with model consistent expectations 10 February 2009
- Appendix 1, pages 59-60 in Monetary Bulletin 2006/3, on the transmission mechanism of monetary policy in the Central Bank's macroeconomic model