The great moderation Icelandic style

Abstract

Reduction in the volatility in macroeconomic time series has been documented for a number of countries. This paper documents similar reduction for the Icelandic economy. The paper estimates the timing of the breakpoint and/or a trend in the variance of the series. The paper finds that the reduction in the variance in changes in Gross National Income (GNI) is larger than the reduction in the variance in the changes in GDP, both because of a reduction in the volatility in terms of trade and because of a reduction in the correlation between changes in GDP and changes in terms of trade. The largest contribution to the decline in the volatility in GNI comes though from the reduction in the volatility in GDP. The paper finds that the volatility in GDP has declined more than the volatility of its components, except export where the decline is greater. The main reason for the decline in the volatility in export is a decline in the volatility in fishing and fish processing. The paper finds that there is a strong relationship between the volatility in export and the volatility in GDP.