Economic Affairs No. 1: Indexation and monetary policy

No. 1
Date: February 2009
Author: Ásgeir Daníelsson
Indexation and monetary policy                                             

Iceland than in other countries, nor has it been demonstrated that indexation is important in this context.

Fixed interest rates have a different type of impact on supply and demand for credit than variable interest rates do. This difference can be significant for the effectiveness of monetary policy if the policy rate is wielded so that real interest rates vary directly with inflation.

Equity and payments vary greatly over time, depending on whether the loans concerned are indexed and amortised or are equal-instalment loans. New loans constitute a higher percentage of total lending in the latter system, and this percentage varies directly with inflation. If monetary policy primarily affects the supply of new loans, this could explain the difference in monetary policy effectiveness.