Central Bank of Iceland economic forecasts
Forward-looking monetary policy is the foundation for the Bank’s achievement of its objective of price stability. In order for monetary policy to be forward-looking, the Bank must assess the short- and long-term economic outlook and the key uncertainties that could affect its forecasts. The Central Bank’s macroeconomic and inflation forecasts are prepared four times a year over a horizon of three years and are published in its Monetary Bulletin. The forecasts are based on an in-depth analysis of economic developments and prospects at the time they are prepared.
The Central Bank’s macroeconomic and inflation forecasts perform an important function in monetary policy conduct. In assessing the inflation outlook, the Bank uses a number of tools, particularly to include 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. Bank staff also use simple time series models and expert assessments of the short-term inflation outlook.
The chart below shows the Central Bank’s most recent inflation forecast.
In addition to its inflation forecasts, the Central Bank publishes forecasts of developments in other economic variables over a horizon of three years. The national accounts provide the main foundation for the assessment of the state of the economy. In addition, Bank staff prepare an independent assessment using statistical analysis of developments in key variables, with consideration given 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 the QMM, was brought into use in 2006. Before that time, the Bank had used an annual model that was not well enough suited to analysis of short-term developments in economic variables. Bank staff members are also developing a new comprehensive equilibrium model that will be used together with the QMM. Such models are considered more suitable for assessments of the effects of economic policy actions on economic developments.
Preparation also began for the development of a new DSGE model, which is more suitable for economic policy simulations and will be used alongside QMM.
- 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