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Prepared by Antoine Magnier.
In this chapter, we use the terms “trend” and “potential” output without any distinction.
Abstracting from the (now likely) construction of a second aluminum smelter in 1997-1998, the staff projections envisage real GDP growth moderating to 3.0 percent and 2.4 percent in 1996 and 1997, and 2.3 in the later years, largely in line with the official NEI projections.
See, for instance, Staiger, Stock and Watson (1996) for a recent study on the precision of conventional and unconventional econometric estimates of the NAIRU in the United States.
The HP filter was used with a detrending parameter λ = 25 and staff medium-term projections for unemployment and wages.
National account estimates indicate large swings in the labor share of income. A standard value of 2/3 is however in line with recent observations of the ratio of the remuneration of employees to gross factor income for the total economy.
All trend variables are obtained from the HP filter, with a detrending parameter λ equal to 25 and staff medium-term projections.
Given the method’s extensive use of the HP filter and the proxy used for capital utilization, this similarity in the results should however not come as a full surprise.
The following results are not significantly affected by substituting estimates of the output gap from the nonparametric approach.
The effective exchange rate indicator is based on Iceland’s 11 main trading partners, with the weighting scheme of the official index basket revised in September 1996.
There are also indications that the official exchange rate of the krona was allowed to depart significantly from its underlying market value until the late sixties, affecting thus the relevance of the nominal effective exchange rate indicator used for this period.