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Indexation and Monetary Policy in Iceland: Is the transmission mechanism of indexed bonds and loans as effective as that of nominal bonds?

Róbertsson, Ragnar Ágúst LU (2024) NEKN01 20241
Department of Economics
Abstract (Swedish)
This thesis examines the transmission mechanism of indexed bonds and loans in comparison to nominal bonds in the context of Iceland's monetary policy. The study analyses the effectiveness of indexed bonds and loans in transmitting monetary policy, in the form of the policy rate, and their impact on the economy by using a VAR model. The study explores the historical background of indexation in Icelandic financial markets and its significance in managing inflation volatility. Additionally, it investigates the differences in the transmission mechanism between nominal and indexed interest rates, considering the protective nature of indexed rates against inflation. The results indicate that indexed lending rates react less in the short term to... (More)
This thesis examines the transmission mechanism of indexed bonds and loans in comparison to nominal bonds in the context of Iceland's monetary policy. The study analyses the effectiveness of indexed bonds and loans in transmitting monetary policy, in the form of the policy rate, and their impact on the economy by using a VAR model. The study explores the historical background of indexation in Icelandic financial markets and its significance in managing inflation volatility. Additionally, it investigates the differences in the transmission mechanism between nominal and indexed interest rates, considering the protective nature of indexed rates against inflation. The results indicate that indexed lending rates react less in the short term to a policy rate increase than nominal lending rates. However, the responses were similar for nominal and indexed market bonds – indicating that the structure of indexed loans might be to blame rather than indexation itself. The findings contribute to a better understanding of the dynamics of monetary policy implementation in economies with significant indexation, such as Iceland. (Less)
Please use this url to cite or link to this publication:
author
Róbertsson, Ragnar Ágúst LU
supervisor
organization
course
NEKN01 20241
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Indexation, Transmission Mechanism, Monetary Policy, Macroeconomics
language
English
id
9155455
date added to LUP
2024-10-01 13:09:04
date last changed
2024-10-01 13:09:04
@misc{9155455,
  abstract     = {{This thesis examines the transmission mechanism of indexed bonds and loans in comparison to nominal bonds in the context of Iceland's monetary policy. The study analyses the effectiveness of indexed bonds and loans in transmitting monetary policy, in the form of the policy rate, and their impact on the economy by using a VAR model. The study explores the historical background of indexation in Icelandic financial markets and its significance in managing inflation volatility. Additionally, it investigates the differences in the transmission mechanism between nominal and indexed interest rates, considering the protective nature of indexed rates against inflation. The results indicate that indexed lending rates react less in the short term to a policy rate increase than nominal lending rates. However, the responses were similar for nominal and indexed market bonds – indicating that the structure of indexed loans might be to blame rather than indexation itself. The findings contribute to a better understanding of the dynamics of monetary policy implementation in economies with significant indexation, such as Iceland.}},
  author       = {{Róbertsson, Ragnar Ágúst}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Indexation and Monetary Policy in Iceland: Is the transmission mechanism of indexed bonds and loans as effective as that of nominal bonds?}},
  year         = {{2024}},
}