Business cycle forecasting and regime switching

This paper applies Hamilton's (1989) Markov-switching model of business cycle dynamics to real GDP in Iceland for the period of 1945 to 1998. The resulting model gives a reasonable description of the data generating process for real GDP and produces business cycles that correspond quite well to conventional wisdom concerning the Icelandic business cycle. Although the model cannot be distinguished from a simple, linear time series model, it offers some improvements in terms of mean absolute forecast errors and in forecasting business cycle turning points to the official forecasts made by the National Economic Institute.

The representative household's demand for money in a cointegrated VAR model

A representative household model with liquidity services directly in the utility function is used to derive a stable, data congruent error correction model of broad money demand in Iceland. This model gives a linear, long-run relation between real money balances, output and the opportunity cost of holding money that is used to over-identify the cointegrating space. The over-identifying restrictions suggest that the representative household is equally averse to variations in consumption and real money holdings. Finally, a forward-looking interpretation of the short-run dynamics, assuming quadratic adjustment costs, cannot be rejected by the data.

Inflation control around the world: Why are some contries more successful than others?

This paper focuses on two important questions concerning inflation performance in a country sample of forty-two of the most developed countries in the world. The firrst is why inflation tends to be more volatile in some countries than in others, in particular in very small, open economies and emerging market economies compared to the large and more developed ones. The empirical analysis suggests that the volatility of the risk premium in multilateral exchange rates, the degree of exchange rate pass-through to inflation, and monetary policy predictability play a key role in explaining the cross-country variation in inflation volatility. Other variables, related to economic development and size, international trade, output volatility, exposure to external shocks, and central bank independence are not found significant. The second question is what explains the general decline in inflation volatility over the sample period. Using a panel approach, the empirical analysis confirms that the adoption of inflation targeting has played a critical role in this improvement in addition to the three variables found important in the cross-country analysis. Inflation targeting therefore continues to play an important role in reducing inflation volatility even after adding the three controls to the panel analysis. The main conclusions are found to be robust to changes in the country sample and to different estimation methods.

How hard can it be? Inflation control around the world

During the last two decades, the level and variability of inflation has declined across the world. Some countries have, however, had more success in controlling inflation than others, and the fact is that these countries are usually the same countries that have been more successful over longer periods. The focus of this paper is to try to understand what factors explain this difference in inflation performance and, in particular, why inflation turns out to be more volatile in very small, open economies and in emerging and developing countries than in the large and more developed ones. Using a country sample of 42 of the most developed countries in the world spanning the period 1985-2005, the results suggest three main explanations: the volatility of currency risk premiums, the degree of exchange rate pass-through to inflation, and the size of monetary policy shocks. These three variables explain about three-quarters of the cross-country variation in inflation volatility. The results are found to be robust to changes in the country sample and to different estimation methods. In particular, they do not seem to arise because of reverse causality due to possible endogeneity of the explanatory variables.

Does inflation targeting lead to excessive exchange rate volatility?

This paper analysis whether the adoption of inflation targeting affects excessive exchange rate volatility, i.e. the share of exchange rate fluctuations not related to economic fundamentals. Using a signal-extraction approach to estimate this excessive volatility in multivariate exchange rates in a sample of forty-four countries, the empirical results show no systematic relationship between inflation targeting and excessive exchange rate volatility. Joint analysis of the effects of inflation targeting and EMU membership shows, however, that a membership in the monetary union significantly reduces this excessive volatility. Together, the results suggest that floating exchange rates not only serve as a shock absorber but are also an independent source of shocks, and that these excessive fluctuations in exchange rates can be reduced by joining a monetary union. At the same time the results suggest that adopting inflation targeting does not by itself contribute to excessive exchange rate volatility.

Out in the cold? Iceland’s trade performance outside the EU

Although entering a currency union involves both costs and benefits, an increasing body of research is finding that the benefits – in terms of international trade creation – are remarkably large. For example, Rose (2000) suggests that countries can up to triple their trade by joining a currency union. If true the impact on trade, income and welfare should Iceland join EMU could be enormous. However, by focussing simply on EMU rather than the broad range of currency unions studied by Rose, we find that the trade impact of EMU is smaller – but still statistically significant and economically important. Our findings suggest that the Iceland's trade with other EMU countries could increase by about 60% and that the trade-to-GDP ratio could rise by 12 percentage points should Iceland join the EU and EMU. This trade boost could consequently raise GDP per capita by roughly 4%. These effects would be even larger if the three current EMU outs (Denmark, Sweden and the UK) were also to enter EMU.

Kristnitökuhátíðin á Þingvöllum og staða þjóðkirkjunnar við þúsaldamót

Hér er fjallað um stöðu þjóðkirkjunnar í íslensku samfélagi frá miðri 20. öld og fram yfir aldamót og kröfu hennar og stuðningsmanna hennar um aukið sjálfstæði frá ríkisvaldinu en um leið óheftan aðgang að hinu opinbera rými sem grundvallartrúarstofnun samfélagsins. Sýnt er fram á að þessi krafa felst í þjóðkirkjuhugtakinu, sem er í senn trúfræðilegt, félagsfræðilegt og lögfræðilegt. Þjóðkirkja gegnir að eigin mati þjónustuhlutverki gagnvart öllum landsmönnum um leið og hún varðveitir hina trúarlegu menningarhefð og miðlar henni til nýrra kynslóða. Kristnitökuhátíðin á Þingvöllum árið 2000 var táknræn staðfesting á þessu og sameiginlegum skilningi ríkis og kirkju að þessu leyti. Um leið var verið að halda upp á og heiðra kirkjuskilning Sigurbjörns Einarssonar biskups sem var áhrifamesti kirkjuleiðtogi Íslands á seinni hluta 20. aldar. Gagnrýnin á þessa hátíð og það að hún varð ekki sú þjóðhátíð sem margir leiðtogar kirkjunnar höfðu vænst til og viðbrögð Sigurbjörns Einarssonar báru vitni um að staða þjóðkirkjunnar í hinu opinbera rými var breytt. Aðgreiningin sem hafði orðið og gagnrýni á sérréttindastöðu kirkjunnar gáfu öflum sem studdu sig við kröfuna um trúfrelsi og jafnræði trúfélaga byr undir báða vængi. Í upphafi 21. aldar er staða þjóðkirkjunnar að mörgu óviss og ímynd hennar hefur skaddast. Sjálfstæði hennar hefur ekki styrkt hana í sessi og sú endurnýjun sem vonast var til að kristnitökuhátíðin hefði í för með sér hefur látið á sér standa.The present essay deals with the situation of the Icelandic National Church within Icelandic society from the middle of the 20th century and into the beginnings of the 21st and the institution’s and her supporters’ demand that the National Church should be granted more independence from the State while at the same time enjoying unhindered admittance to the public sphere in her role of being the basic religious institution in the society. It was argued that this demand rests on the very idea inherent in the concept of a national church, she being simultaneously a religious, societal and legal identity. A national church views herself as being obliged to render service to all the inhabitants of the country and at the same time she considers herself to be a guardian of the religious-cultural traditions having the task to communicate them to new generations. The festivities commemorating the acceptance of Christianity at Þingvellir (Parliament Plains) in the year of 2000 were a symbolic confirmation of this and also the mutual agreement between state and church in this regard. Also at the festivities Bishop Sigurbjörn Einarsson’s thoughts concerning the church were celebrated and honored, but he was the most influential church leader in Iceland during the latter half of the 20th century. The criticism of the festivities, the fact that they did not turn out to be the national festival occasion that the leaders within the church had envisaged, and Sigurbjörn Einarsson’s reactions proved that the situation of the National Church within the public sphere had undergone a change. The divergence that had come about and the criticism of the privileged positon of the church proved to be very favorable to groups demanding religious freedom and the equal rights of religious societies. At the outset of the 21st century the situation of the church is uncertain and her image has been damaged. Her independence has not made her position firmer and the renewal that the festivities commemorating the acceptance of Christianity were supposed to bring, has not materialized.Peer Reviewe

Wage Formation in a Cointegrated VAR Model: A Demand and Supply Approach.

Usually cointegrated VAR models of wage formation are analysed in a wage-price setup. However, theoretical wage bargaining models provide the background for a wage-employment setup. The two relations of interest are the labour demand equation from the profit maximizing firms and the (bargained) wage equation from maximizing the Nash product of the wage bargaining process. From the underlying economic model we derive explicit parameter restrictions which are analysed using a multivariate cointegration approach, using quarterly data from Denmark. These restrictions are not rejected and the theoretical model with maximizing agents can be said to give a good description of wage formation in Denmark.

Ein kirkja í fjórum farvegum

Í þessari ritgerð er fjallað um það hvernig kirkjuleiðtogar, safnaðarfólk og prestar skilgreina hlutverk og verkefni þjóðkirkjunnar. Í ljós kemur að um er að ræða ólíkan kirkju- og embættisskilning. Með því að styðjast við hugtakið „kjörmynd“ (ideal type), eins og Max Weber skilgreinir það, koma í ljós fjórar meginstefnur í kirkju- og trúmálum á 20. öld: þjóð-kirkjustefnan, lágkirkjustefnan, hákirkjustefnan og alkirkjustefnan. Sérkenni þessara ólíku stefna eru skilgreind, en þau birtast sjaldan hreinræktuð. Bent er á að einstakar kirkjustefnur og kirkjuleiðtogar bera með sér einkenni fleiri en einnar kjörmyndar. Fjallað er um Sigurbjörn Einarsson biskup í þessu sambandi.In this essay different ideas about the role and the tasks of the National Church of Iceland in the 20th century are discussed. Four ideal types are the results of this analysis: The National Church, The Low Church, the High Church and the Universal Church. Individual church leaders and church policy programs are characterized by more than one ideal type. Bishop Sigurbjörn Einarsson is especially interesting in this respect.Peer Reviewe

Religion and Politics – The Icelandic Experiment

In a comment on Richard F. Tomasson’s 1980 book about Iceland, the American sociologist Seymour Martin Lipset notes that Tomasson ‘traces the ways in which Icelandic culture developed out of the medieval pre-Christian society – in its language, relations between the sexes, egalitarianism and the high frequency of illegitimate births. He also points out the areas of contradictions and discontinuity, noting that Iceland has been transformed in the twentieth century by modernization of the society and international influences upon the culture.’ The purpose of this essay is to give a more in-depth analysis of some of Tomasson’s observations with regard to the status and role of religion in this society. Iceland appears to be a very secular society, but up to very recent times, the national church had a strong position in Icelandic society, and its participation in the life-rituals of families, in national festivals, and in local rituals and festivities has been considered self-evident by the authorities and a large majority of the people. A very homogeneous culture and strong nationalism have a role here to play, but there were also seeds of individualism and pragmatism which may have led the way to differentiation and secularization. Secularization and modernization went hand in hand with the national liberation movement, but nevertheless the national church also made a major contribution to the nation-state building process. It would seem that the Icelanders have throughout their history been more political than religious – and often they seem to have been tolerant in religious and moral issues but fundamentalists in political matters. At least it seems profitable to analyse the reli- gious history of Iceland – the conversion of Iceland at the Alþingi in the summer of 1000; the Reformation in the mid-16th century, and the rapid process of modernization in Iceland – in the context of the political history. Foreigners have often wondered about the liberal attitude of Icelanders in relation to premarital sex, and often they ask why spiritualism and belief in elves and hidden people seem to have survived modernization and secularization. Other possible paradoxes include the very recent appearance of non-Christian religions, such as the Asa faith (which is supposed to revive the pre-Christian religion in Iceland), Islam and Buddhism. And how are we to understand the general support, even among the clergy, for same-sex marriages? In my essay I will try to contextualize these and related questions into an overall picture of the religious history of the Icelandic people.