Monetary policy and interrelationships in the Norwegian economy Governor Øystein Olsen.
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Transcript of Monetary policy and interrelationships in the Norwegian economy Governor Øystein Olsen.
![Page 1: Monetary policy and interrelationships in the Norwegian economy Governor Øystein Olsen.](https://reader035.fdocuments.in/reader035/viewer/2022062620/551a6b34550346b52d8b4cef/html5/thumbnails/1.jpg)
Monetary policy and interrelationships in the Norwegian economy
Governor Øystein Olsen
![Page 2: Monetary policy and interrelationships in the Norwegian economy Governor Øystein Olsen.](https://reader035.fdocuments.in/reader035/viewer/2022062620/551a6b34550346b52d8b4cef/html5/thumbnails/2.jpg)
Different horizons – different models
Long term
0-1 year 1-4 years
Statistical models (SAM)
Equilibrium models
Business cycle models(NEMO)
Horizon
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Main requirements for a model for monetary policy
1. Monetary policy controls inflation
2. Expectations must be included
3. Based on theory and empirical data
4. Understandable and easy to communicate
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Growth and inflationPercentage annual growth. Average
1980s 1995-20100
1
2
3
4
5
6
7
8
9
Inflation (CPI)
Mainland GDP
Sources: Statistics Norway and Norges Bank
![Page 5: Monetary policy and interrelationships in the Norwegian economy Governor Øystein Olsen.](https://reader035.fdocuments.in/reader035/viewer/2022062620/551a6b34550346b52d8b4cef/html5/thumbnails/5.jpg)
Main requirements for a model for monetary policy
1. Monetary policy controls inflation
2. Expectations must be included
3. Based on theory and empirical data
4. Understandable and easy to communicate
![Page 6: Monetary policy and interrelationships in the Norwegian economy Governor Øystein Olsen.](https://reader035.fdocuments.in/reader035/viewer/2022062620/551a6b34550346b52d8b4cef/html5/thumbnails/6.jpg)
“Essentially, all models are wrong, but some are useful.”
George Box (1979)
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Output and inflationPercentage deviation from trend
1994 1997 2000 2003 2006 2009-6
-4
-2
0
2
4
6
-2
-1
0
1
2Output gap, left-hand scaleInflation gap, right-hand scale
Sources: Statistics Norway and Norges Bank
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Output and unemploymentPercentage deviation from trend
1994 1997 2000 2003 2006 2009-6
-4
-2
0
2
4
6
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
Output gap, left-hand scale
Unemployment gap, right-hand scale
Sources: Statistics Norway and Norges Bank
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Unemployment and wage growthPercentage deviation from trend
1994 1997 2000 2003 2006 2009-4
-3
-2
-1
0
1
2
3
-4
-3
-2
-1
0
1
2
3Wage gapUnemployment gap
Sources: Statistics Norway and Norges Bank
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Wage growth and inflation Percentage deviation from trend
1994 1997 2000 2003 2006 2009-3
-2
-1
0
1
2
3
-3
-2
-1
0
1
2
3Wage gap
Sources: Statistics Norway and Norges Bank
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The interest rate is an endogenous variable
The effect of a change in the interest rate depends on: The reason for the change Whether the change is a surprise Whether the change is temporary or of
long duration
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VAR model (vector autoregressive model, structural)
Mainland GDP Inflation (CPI-ATE) Exchange rate Interest rate
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Isolated effect on GDP of an interest rate increase in two different VAR modelsPer cent
0 3 6 9 12 15 18 21 24 27 30 33 36 39-1
-0.5
0
0.5
1
-1
-0.5
0
0.5
1
Estimation period 1996-2009
Estimation period 1986-2009
Quarters Source: Norges Bank
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Maximum impact of a 1 percentage point interest rate increase, different estimation periods
GDPPer cent
-0.8
-0.6
-0.4
-0.2
0.0
-0.8
-0.6
-0.4
-0.2
0
1986- 1989- 1992- 1995- 2009 2009 2009 2009
InflationPercentage points
-0.4
-0.3
-0.2
-0.1
0.0
-0.4
-0.3
-0.2
-0.1
0
1986- 1989- 1992- 1995- 2009 2009 2009 2009
Source: Norges Bank
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Number of quarters to maximum effect of interest rate change, different estimation periods
GDP
0
2
4
6
8
10
12
14
0
2
4
6
8
10
12
14
1986- 1989- 1992- 1995- 2009 2009 2009 2009
Inflation
0
2
4
6
8
10
12
14
0
2
4
6
8
10
12
14
Source: Norges Bank
1986- 1989- 1992- 1995- 2009 2009 2009 2009
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Effect of monetary policy shocks, different models/estimation periods
GDPPer cent
0 5 10 15 20 25 30 35 40-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
InflationPercentage points
0 6 12 18 24 30 36-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
Quarters Quarters Source: Norges Bank
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NEMO (Norwegian Economy Model)
General equilibrium model (DSGE)
Forward-looking participants
Monetary policy controls inflation and gives weight to stabilising output
No long-term trade-off between inflation and unemployment
Estimated on Norwegian data
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Effect of monetary policy shocks in the VAR models and in NEMO
GDPPer cent
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
NEMO
InflationPercentage points
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
NEMO
Quarters Quarters Source: Norges Bank
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Projected inflation and output gap in the baseline scenario from MPR 2/11 Per cent. Quarterly figures. 2008 Q1 – 2014 Q4
2008 2010 2012 2014-4
-3
-2
-1
0
1
2
3
4
-1
0
1
2
3
4
5
6
Output gap, left-hand scale
CPIXE, right-hand scale
Sources: Statistics Norway and Norges Bank
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Projected key policy rate in the baseline scenario from MPR 2/11 with fan chart Per cent. Quarterly figures. 2008 Q1 – 2014 Q4
2008 2009 2010 2011 2012 2013 20140
1
2
3
4
5
6
7
8
9
0
1
2
3
4
5
6
7
8
9
Source: Norges Bank
90% 70% 50% 30%
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Key policy rate in the baseline scenario and in the alternative scenarios from MPR 2/11 Per cent. Quarterly figures. 2008 Q1 - 2014 Q4
2008 2009 2010 2011 2012 2013 20140
1
2
3
4
5
6
7
8
9
0
1
2
3
4
5
6
7
8
9
Baseline scenario
Higher price and cost inflation
Lower growth abroad
Source: Norges Bank
90% 70% 50% 30%
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Summary: Response pattern in interest rate setting
Empirically anchored Theory-based Professional judgement Learning