monetary policy and interrelationships in the norwegian economy governor Øystein olsen
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Monetary policy and interrelationships in the Norwegian economy
Governor Øystein Olsen
Different horizons – different models
Long term
0-1 year 1-4 years
Statistical models (SAM)
Equilibrium models
Business cycle models(NEMO)
Horizon
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
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
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
“Essentially, all models are wrong, but some are useful.”
George Box (1979)
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
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
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
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
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
VAR model (vector autoregressive model, structural)
Mainland GDP Inflation (CPI-ATE) Exchange rate Interest rate
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
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
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
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
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
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
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
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%
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%
Summary: Response pattern in interest rate setting
Empirically anchored Theory-based Professional judgement Learning