The Central Bank of Iceland has published the working paper "Too Little, Too Late? Testing The Optimality of Monetary Policy in Iceland" by Birta B. Haraldsdóttir and Bjarni G. Einarsson, economists in the department of Economics and Monetary Policy.
The paper applies a sufficient statistics framework to detect nonoptimal monetary policy decisions in Iceland. The method relies on two sufficient statistics: (1) forecasts of policy objectives and (2) impulse responses of those objectives to monetary policy shocks. The weighted product of these two sufficient statistics forms the gradient of the policy maker's loss function. The Optimal Policy Perturbation (OPP) statistic, derived from this gradient, provides the test for optimization failures. The results suggest that the Central Bank of Iceland's key interest rate has, on average, been set too low over the past two decades. There are two notable deviations from optimality: the periods leading up to the financial crisis and following the Covid-19 pandemic.
The working paper can be accessed here: