Macroeconomic analysis through an error correction model of country risk premium and per capita gross domestic product (GDP). Case study: Iceland from 1992 to 2020.

Abstract

Iceland underwent a significant financial crisis and subsequent economic recession after the 2008/2009 financial crisis hit the country. It was the worst crisis ever experienced by a small country since the late 20th century. Since the 1980s, Iceland's macroeconomic stability has consistently deteriorated due to volatile annual Gross Domestic Product per capita (GDP per capita) and the dynamics of asset price inflation. This article conducts a comprehensive analysis of the macroeconomic, banking, and financial background of the crisis. It also provides a short-term analysis of Iceland's macroeconomic prospects. The main findings of the article conclude that the depth of the relationship between the macroeconomic variables evolves in the two selected variables for study: the price risk premium and GDP per capita in constant terms. Stationarity tests are performed on the studied variables at levels. It is observed that the time series of the risk premium and GDP per capita in constant terms are not stationary at levels.