A wide range of research is conducted within the Central Bank in connection with its functions. Most has been centred in the Economics Department until now, but an increasing focus is also given to research at the Financial Stability Department. On occasion, the Central Bank commissions or backs outside research.
Projects in 2006 included ongoing work on the Bank’s new quarterly macroeconomic model (QMM) and preparation for development of a new DSGE (dynamic stochastic general equilibrium) model, a study of the impact of structural changes on the Icelandic housing market, development of a leading indicator model for the domestic business cycle, a study of the supply side of small new Keynesian DSGE models and design of new currency baskets for the Icelandic króna.
Among the main research projects launched or in progress at the end of 2006 were estimations of a Bayesian forecasting model for inflation in Iceland, the yield curve for domestic interest rates, a simple forecasting system for demand and inflation, a VAR model for high-frequency indicators, a model of the Icelandic financial system and estimates of expected and unexpected default for commercial banks. A comprehensive research project was also launched into specific monetary policy tasks in very small open economies with an independent floating currency.
A number of smaller research projects are ongoing, including design of short-term forecasting models for key subcomponents of the CPI, an estimation of the impact of foreign labour on the Icelandic economy, a study of automatic fiscal stabilisers, design of indicators for the housing market and residential investment, and studies of the relation between income and consumption, of the origin, composition and funding of the current account deficit, and of the informational value of preliminary national accounts estimates.
Various long-term projects are also in progress, several in cooperation with academics in Iceland and abroad. These include design of methodologies for estimating the output gap, studies of domestic real interest rates and of changes in the pass-through from the exchange rate of the króna to inflation, and development of stress tests for the financial system.