Economic Memos provide insight into the analysis work being performed by Danmarks Nationalbank’s employees. For example, Economic Memos contain background analyses and method descriptions. Economic Memos are primarily targeted at people who already have a knowledge of economic and financial analyses.
Trends and cycles in the Danish economy
I present empirical results on the contribution of three key drivers of inflation in Denmark: an inflation trend anchored by inflation expectations; the Danish business cycle; and an energy price cycle. All three drivers contribute significantly to the development of inflation and explain most of the variation in the last 40 years. The results are based on a data-driven trend-cycle model estimated over the period from 1985 to 2023. The impact of the cyclical gap on inflation manifests itself via an active and stable Danish Phillips curve relationship. In the context of the Danish economy, the model also provides new estimates of GDP, employment, and unemployment rate gaps, as well as an inflation-relevant activity gap. (The memo is in Danish only).
Key messages
Why is it important?
Understanding the drivers behind economic developments is an essential input for economic policy decision-making processes. This memo presents a model that quantifies the size and contribution of three key drivers of inflation. The model provides both a historical decomposition, current insights, and forecasts of future developments. These insights provide knowledge about whether and how to best organise economic policy, including measures to ensure stable price development.
Main chart
Drivers behind the cyclical movements in the Danish economy from 1985 to 2023
Note:
The black line shows the total cycle for each variable. The total cycle is the sum of the common and idiosyncratic cycles. The total cycle is also the difference between the actual observed value of each variable and its model-estimated trend.