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Monetary policy in crisis : an assessment of the Norwegian monetary policy response to the Covid-19 pandemic

Etterlid, Synnva Eide; Iden, Anna Emilie
Master thesis
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URI
https://hdl.handle.net/11250/2769990
Date
2021
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  • Master Thesis [4207]
Abstract
In order to assess the monetary policy response to the ongoing crisis, this thesis combines a

broad case study with detailed graphical analyses of key events and economic variables. We

discuss how a broad range of policies has been used to tackle the crisis, interpreting central

relations through the lens of macroeconomic models. Furthermore, we discuss the

shortcomings of existing literature in incorporating the policy tools used in the policy

response. We construct a “Taylor gap”, which reveals a systematic divergence between the

policy rate and a simple Taylor rule in periods of economic unrest. The most prominent gap,

of 4 percentage points, is observed in the third quarter of 2020. We interpret this to result from

the prioritization of other policy objectives in addition to reducing the output and inflation

gap. Comparing projections of the two rates shows that in the long-term, no-shock scenario,

the policy rate seems to converge with our policy rule. Liquidity measures seem to have

successfully aided transmission from policy to market rates, stabilized risk premiums, and met

interbank liquidity goals. The diverging indicators of selected financial variables explain the

moderate reduction in the countercyclical capital buffer and shed light on the trade-off between

different policy objectives. We find that financial stability risk in specific indicators may

develop from the expansionary policy. Yet, we argue that macroprudential policy has likely

softened the blow of the crisis. The monetary policy response to the covid-19 crisis illustrates

how combining various measures is necessary to balance conflicting monetary policy

objectives in a crisis.

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