House prices in Norway 1819-1989

Annual house price indices for four Norwegian cities are presented for the period from 1819 to 1989. The indices are constructed on the basis of nominal housing transaction prices compiled from the real property registers of the cities. Existing Norwegian house prices indices generally cover a few decades and usually start in the mid-1980s. Hence, we present new information about Norwegian house prices for more than 160 years. The house price indices seem to fit well in with historical events and available indicators of the Norwegian economy. The overall trend in nominal house prices is upward sloping over the two centuries. However, in real terms the picture looks different, in particular in the first half of the twentieth century.Economic history, house prices, repeat sales indices

Flexible inflation targeting and financial stability: Is it enough to stabilise inflation and output?

We investigate empirically whether a central bank can promote financial stability by stabilising inflation and output, and whether additional stabilisation of asset prices and credit growth would enhance financial stability, in particular. We employ an econometric model of the Norwegian economy to investigate the performance of simple interest rate rules that allow a response to asset prices and credit growth, in addition to inflation and output. We find that output stability also promotes financial stability, while inflation stability is achieved at the expense of both output and financial stability. A stabilisation of house prices, equity prices and/or credit growth enhances stability in both inflation and output, but not financial stability. By contrast, stabilisation of the nominal exchange rate induces excess volatility in general.Monetary policy, financial stability, asset prices, interest rate rules.

Monetary policy and asset prices: To respond or not?

We investigate whether there is a case for asset prices in interest rates rules within a small econometric model of the Norwegian economy, modeling the interdependence of the real economy, credit and three classes of assets prices: housing prices, equity prices and the nominal exchange rate. We compare the performance of simple and efficient interest rate rules that allow for response to movements in asset prices to the performance of more standard monetary policy rules. We find that including housing prices and equity prices in the policy rules can improve macroeconomic performance in terms of both nominal and real economic stability. In contrast, a response to nominal exchange rate fluctuations can induce excess volatility in general and prove detrimental to macroeconomic stability.Monetary policy, asset prices, simple interest rate rules, econometric model

Monetary policy and asset prices: To respond or not?

We investigate whether there is a case for asset prices in interest rates rules within a small econometric model of the Norwegian economy, modeling the interdependence of the real economy, credit and three classes of assets prices: housing prices, equity prices and the nominal exchange rate. We compare the performance of simple and efficient interest rate rules that allow for response to movements in asset prices to the performance of more standard monetary policy rules. We find that including housing prices and equity prices in the policy rules can improve macroeconomic performance in terms of both nominal and real economic stability. In contrast, a response to nominal exchange rate fluctuations can induce excess volatility in general and prove detrimental to macroeconomic stability.Monetary policy; asset prices; simple interest rate rules; econometric model

Non-linear dynamics in output, real exchange rates and real money balances: Norway, 1830-2003

We characterise the behaviour of Norwegian output, the real exchange rate and real money balances over a period of almost two centuries. The empirical analysis is based on a new annual data set that has recently been compiled and covers the period 1830{2003. We apply multivariate linear and smooth transition regression models proposed by Terasvirta (1998) to capture broad trends, and take into account non-linear features of the time series. We particularly investigate and characterise the form of the relationship between output and monetary policy variables. It appears that allowance for statedependent behaviour and response to shocks increases the explanatory powers of the models and helps bring forward new aspects of the dynamic behaviour of output, the real exchange rate and real money balances.Business cycles, real exchange rates, money demand, non-linear modelling, smooth transition regressions.

Managing uncertainty through robust-satisficing monetary policy

We employ information-gap decision theory to derive a robust monetary policy response to Knightian parameter uncertainty. This approach provides a quantitative answer to the question: For a specified policy, how much can our models and data err or vary, without rendering the outcome of that policy unacceptable to a policymaker? For a given acceptable level of performance, the policymaker selects the policy that delivers acceptable performance under the greatest range of uncertainty. We show that such information-gap robustness is a proxy for probability of policy success. Hence, policies that are likely to succeed can be identified without knowing the probability distribution. We adopt this approach to investigate empirically the robust monetary policy response to a supply shock with an uncertain degree of persistence.Knightian uncertainty, Monetary policy, Info-gap decision theory.

Real-time Data for Norway: Challenges for Monetary Policy

National accounts data are always revised. Not only recent data, but also figures dating many years back can be revised substantially. This means that there is a danger that an important part of the central bank's information set is flawed for a long period of time. In this paper we present a data base consisting of various vintages of real-time data from 1993Q1 to 2003Q4. We describe the nature of the data revisions, the causes of the revisions, and investigate whether the revisions are true martingale differences, or whether they can be forecasted. In the spirit of Orphanides and van Norden (2002), we analyze how data revisions and model uncertainty affect the reliability of output gap estimates. We also compare Taylor type interest rate rules based on real-time data versus final data and assess the consequences for monetary policy if policy was conducted using this type of interest rate rules. Finally, we analyze the implications of output gap uncertainty for monetary policy using a small New Keynesian macroeconomic model. --Monetary policy,output gap,real-time data,interest rate rules

Inference in small cointegrated systems: some Monte Carlo results

The Johansen procedure for testing and estimating cointegration models is analysed from a practitioner's perspective. We adress the robustness of the cointegration tests in small samples and with respect to particular types of misspecification of the model. A small cointegrated system is parameterized and forms the basis for the Monte Carlo simulations. Non-parametric estimates of the distribution of the Trace and )- Max tests are reported, as well as for some of the estimators for long- and short-run parameters in the model respectively. Power properties and finite sample performance for the cointegration test and estimators are discussed and the results are interpreted in the light of available asymptotics. The types of model misspecification considered include the case with wrong dynamic specification (i.e. wrong order k in the VAR model) and the case when we ignore non-normality in the DGP residuals (i.e. when the DGP residuals are subject to ARCH (Auto Regressive Conditional Heteroscedasticity) or are serially correlated). We also discuss how data properties like temporal aggregation or systematic sampling may affect the inference on cointegration, and how the Johansen procedure performs under those conditions. Finally, we consider the case with cointegration between non-stationary latent variables which are observed with measurement errors.publishedVersio

Flexible Inflation Targeting and Financial Stability: Is It Enough to Stabilise Inflation and Output?

We investigate empirically whether a central bank can promote financial stability by stabilizing inflation and output, and whether additional stabilization of asset prices and credit growth would enhance financial stability in particular. We employ an econometric model of the Norwegian economy to investigate the performance of simple interest rate rules that allow a response to asset prices and credit growth, in addition to inflation and output. We find that output stabilization tends to improve financial stability. Additional stabilization of house prices, equity prices and/or credit growth enhances stability in both inflation and output, but has mixed effects on financial stability. In general, financial stability as measured by e.g. asset price volatility improves, while financial stability measured by indicators that depend directly on interest rates deteriorates, mainly because of higher interest rate volatility owing to a more active monetary policy.publishedVersio

Bank Regulation and Bank Crisis

The Norwegian experiences of the past thirty years illustrate what we believe are two general tendencies in bank regulation. The first one is that a bank crisis will tend to focus regulators' minds and lead to stricter regulations. The second one is that cycles in regulation tend to interact with the economic cycle, in the sense that the rationale for strong regulation tends to become somewhat blurred when the economy is booming. These patterns appear in the Norwegian experience after the banking crisis of 1988-92, and they can presumably also be recognized in many other jurisdictions.publishedVersio