Working paper no. 94: Monetary transmission in Iceland: Evidence from a structural VAR model
The Central Bank of Iceland has published the working paper "Monetary transmission in Iceland: Evidence from a structural VAR model" by Thórarinn G. Pétursson chief economist at the Central Bank.
The paper analyses the transmission mechanism of monetary policy in Iceland using a structural VAR model. Consistent with the international literature, an unexpected monetary policy tightening leads to a temporary but sizable contraction in output, a sustained appreciation of the nominal exchange rate, and a more sluggish and persistent decline in inflation. The VAR model is also used to identify three other structural shocks, with plausible economic interpretations, which can explain the bulk of the variation in output and inflation over the sample period.
The working paper by Thórarinn G. Pétursson can be accessed here: Monetary transmission in Iceland: Evidence from a structural VAR model