What sets the trend? The evolution and drivers of Icelandic trend inflation

Bjarni G. Einarsson;Thórarinn G. Pétursson
Authors registered in the RePEc Author Service: Bjarni G. Einarsson and Thórarinn G. Pétursson

Economics from Department of Economics, Central bank of Iceland

Abstract: We use Bayesian methods to estimate a model of trend inflation in Iceland, allowing for stochastic volatility in both the trend and cyclical components of inflation and a time-varying persistence of deviation of inflation from its trend. Our results show that although trend inflation has fallen and become more stable since the mid-1980s, most of the improvements in overall inflation performance in Iceland reflects a decline in the volatility and persistence of the cyclical component of inflation. At the same time, our results suggest that the share of overall inflation dynamics accounted for by the trend component has significantly risen in recent years. We also find that the trend continues to be more volatile than in other advanced economies, largely reflecting less firmly anchored inflation expectations and, more recently, the interaction of weakly anchored inflation expectations and large global supply shocks.

JEL-codes: C11 C32 E31 E52 E58 (search for similar items in EconPapers)
Date: 2026-03
New Economics Papers: this item is included in nep-his and nep-mon
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