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Assessing the effect of moves in the key policy rate : a narrative approach for Norway

Johnsen, Herman K. Lange; Bratlie, Johannes
Master thesis
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URI
http://hdl.handle.net/11250/2404556
Date
2016
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  • Master Thesis [4657]
Abstract
This thesis estimates the effect of the key policy rate on inflation and output for the Norwegian

economy. It applies the narrative identification strategy, pioneered by Romer and Romer, to

identify monetary policy shocks and construct a new measure of monetary policy for Norway.

To our knowledge, this approach has never before been applied on Norwegian data. The new

measure of monetary policy is derived through the construction of a new, real-time forecast

data set, in order to purge the key policy rate of anticipatory movements. It is shown that

estimating a Taylor rule captures a substantial part of Norges Bank’s real-time information set.

To assess the impact of monetary policy in Norway, the new measure of monetary policy is

employed in a vector autoregression. Following a one percentage point shock to the new

measure of monetary policy, the thesis finds that inflation decreases by up to 1.75 percentage

points after five quarters, and that output is reduced by up to 2.71 percentage points after seven

quarters. These estimated effects are significantly larger than the results previously obtained on

Norwegian data. Since the previous studies employ the actual key policy rate as the policy

instrument, this might imply that the new measure of monetary policy, derived in this thesis, is

relatively free of anticipatory movements. The new measure could therefore yield more precise

estimates of the key policy rate’s effect on economic variables. The inclusion of real-time

forecasts, in the construction of the new measure of monetary policy, is shown to be essential

for obtaining the baseline effects. Thisthesis demonstrates that the baseline results are relatively

robust to a wide range of different specifications of the baseline vector autoregression.

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