dc.description.abstract | How does an economy respond when policymakers change interest rates? In this thesis we
seek to answer this question by examining the Norwegian monetary policy transmission
mechanism. Further, we discuss the evolution in macroeconomic thought on the monetary
policy transmission mechanism and present related empirical evidence. In particular, we
use a Factor-augmented Vector Autoregression (FAVAR) approach to examine the policy
instrument effect over the last twenty-five years, where we assess the response of a
contractionary monetary shock on a broad dataset of 102 variables across the Norwegian
economy.
Present-day policymakers monitor a large set of variables in their decision-making. In order
to reduce the omitted-information problem of small-scale vector autoregression (VAR)
models, we combine the VAR methodology with dynamic factor analysis to assess the effect
of a monetary policy shock on the Norwegian economy. Specifically, the FAVAR model
allows us to better capture the dynamics of the economy by being designed to handle a
large information set, thereby minimizing the probability of biased results. Utilizing a rich
dataset of 103 macroeconomic variables, spanning from 1990:M1 to 2016:M9, we add to
the literature by examining and evaluating the transmission mechanism of monetary policy
in Norway.
The results indeed show that the policy effect is strong and significant across a broad set
of variables in the economy. Furthermore, the results are broadly in line with economic
intuition, indicating a dampening effect on real activity following a contractionary monetary
policy. These findings are consistent with the effects found in earlier literature for
the U.S. economy (Bernanke, Boivin, et al., 2005; Stock and Watson, 2005), and provides
valuable insight on the transmission mechanism of monetary policy in Norway. | nb_NO |