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.

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

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.

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

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.

Measured Static and Rotordynamic Characteristics of a Circumferentially-grooved-stator/smooth-rotor Liquid Annular Seal: Influence of Viscosity, Eccentricity, Pressure, and Speed

Circumferential grooves are often machined into annular seals to reduce leakage rates (???). For this study, a circumferentially-grooved annular seal (CGS) was tested with three different viscosity (?) test fluids. In addition to varying ?; differential pressure (?P), rotor speed (?), and static eccentricity (?o) were varied. Tests are conducted to determine how static and rotordynamic characteristics of a CGS are affected by ? changes. The measured results are compared to predictions, and a smooth seal when applicable. Testing was conducted with three test fluids, ISO VG 2 (turbulent flow regime), VG 46 (laminar and turbulent flow), and VG 100 (laminar flow) oils. Speed was varied from 2-8 krpm, ?P across the seal 2.07-8.27 bar, and ?o from centered (0.00) to 0.80. Geometry of the CGS has a radial clearance (Cr) of 0.1905mm (7.5mils) with 15 equally spaced square grooves with a groove length and groove depth of 1.52 mm. Length to diameter ratio (L/D) is 0.5. Test fluid is supplied circumferentially and in the direction of rotor rotation to introduce preswirl at the seal inlet. Increasing ? produced the following results: (1) decreasing ??? , (2) increasing direct and effective damping, and (3) increased direct virtual-mass. Direct stiffness was often negative. Cross-coupled stiffness was opposite in sign (destabilizing). For an ESP with CGSs, increasing ? is expected to lower the natural frequencies of the rotor system. Additionally, increasing ? is not expected to result in a rotor instability. The VG 46 test results were significantly different from those of VG 2 and VG 100. Results for VG 46 at low ?, consisted of a low phase angle (angle between the applied static load vector and ?o), small cross-coupled stiffness, and small whirl frequency ratio. While these VG 46 results are consistent with themselves, this behavior was not observed in the VG 2 and VG 100 test results. For the turbulent flow seal, grooves have the effect of reducing the rotordynamic coefficients, and reducing the dependence of the rotordynamic coefficients on ?o (changes were generally small with changing ?o) when compared to a smooth seal. Static and rotordynamic characteristics were poorly predicated by the available turbulentflow seal analysis code. For the laminar flow seal code used, ??? , cross-coupled stiffness (k), and direct damping (C) were reasonably predicted. Direct stiffness (K), cross-coupled damping (c), and static load were poorly predicted

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

Error-correction versus Differencing in Macroeconomic Forecasting

Recent work by Clements and Hendry have shown why forecasting systems that are in terms of differences, dVARs, can be more accurate than econometric models that include levels variables, ECMs. For example, dVAR forecasts are insulated from parameter non-constancies in the long run mean of the cointegration relationships. In this paper, the practical relevance of these issues are investigated for RIMINI, the quarterly model of the Central Bank of Norway, which we take as an example of an ECM forecasting model

Progress form forecast failure: The Norwegian consumption function

After a forecast failure, a respecification is usually necessary to account for the data ex post, in which case there is a gain in knowledge as a result of the forecast failure. Using Norwegian consumption as an example, we show that the financial deregulation in the mid 1980s led to forecast failure both for consumption functions and Euler equations. This constellation of forecast failures is shown to be inconsistent with an underlying Euler equation, a result that also explains why progress took the form of a respecified consumption function where wealth plays a central role. That model is updated and is shown to have constant parameters despite huge changes in the income to wealth ratio over nine years of new data