Analysing inflation dynamics in Iceland using a Bayesian structural vector autoregression model

Stefán Thórarinsson

Economics from Department of Economics, Central bank of Iceland

Abstract: This paper seeks to determine what drives inflation variation in Iceland and examine the extent to which local currency pricing is present. To that end we define and estimate a Bayesian structural vector autoregression model. For identification we employ the method developed by Baumeister and Hamilton (2015), defining priors on the impact matrix and on the long run behaviour of the model. We find that supply shocks and exchange rate shocks are the largest contributors in short run dynamics of inflation while foreign shocks dominate the medium and long run horizons. Our results strongly suggest that local currency pricing is largely absent. A test of robustness suggests that our results w.r.t. foreign influences on domestic inflation hold. Whether foreign demand or foreign inflation plays a larger role in determining long horizon variation in inflation seems to vary considerably over the period considered.

JEL-codes: C11 C32 E31 F41 (search for similar items in EconPapers)
Date: 2022-01
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-his, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:ice:wpaper:wp88

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