The Impact of Expansionary Monetary Policy on Norwegian Stock Prices: A Structural Vector Autoregressive Analysis of the Past Three Decades

Abstract

This paper aims to evaluate the impact of domestic monetary policy shocks on Norwegian stock prices, as well as the impact in a historically low interest rate environment. Consequently, the analysis is comprised of ( l ) the baseline model from 1991:Ml to 2019:M6 and (2) the model following the financial crisis from 2009:M6 to 2019:M6. Building on Neri (2004) and Bjornland (2009), a structural vector autoregression (SVAR) with short-run restrictions and Cholesky decomposition is utilized. The estimated models consist of the oil price, inflation, output, three-month interest rate, trade-weighted exchange rate index, and stock prices. Impulse responses and variance decomposition are used to evaluate the impact of the monetary policy shocks. Consistent with prior research and theory, the results of the baseline model indicate a significant negative relationship between a change in the three-month interest rate and stock prices. In particular, following a 100 basis points decrease in the three-month interest rate (Nibor), stock prices (OSEBX) increase by l percent on impact and 2 percent after six months. Moreover, the monetary policy shock accounts for slightly less than 10 percent of the variations in stock prices after six months and roughly 20 percent after two years. These results are relatively robust to different specifications. Examining the model from mid-2009 to mid-2019, a decrease of 100 basis points in Nibor increases stock prices by 0.5 percent on impact, with the effect gradually waning over time. Therefore, the effectiveness of the monetary transmission mechanism to stock prices appears to have diminished when interest rates have been historically low. The results indeed provide updated validity to previous literature and valuable insight into the monetary policy transmission mechanism in Norway.