Efficient consumption of revenues from natural resources – An application to Norwegian petroleum revenues

This paper addresses the so-called natural resource curse by devising a rule that can reduce macroeconomic costs associated with the consumption of revenues from natural resources. It assumes that such macroeconomic costs are mainly brought about by changes in the real exchange rate, which adjusts in order to maintain external balance. Thus it derives a consumption rule, denoted as the efficient consumption rate, that would make the behaviour of the real exchange rate mimic that of the real exchange rate in the absence of natural resources. Accordingly, growth of exports and imports of traditional goods and services, and implicitly the sectoral composition of the economy, become largely immune to the consumption of natural resources. The theoretical framework is applied to estimate and evaluate an efficient consumption rate for Norway’s sizeable petroleum revenues.Natural resources, Dutch disease, real exchange rate.

Model selection for monetary policy analysis – Importance of empirical validity

We investigate the importance of employing a valid model for monetary policy analysis. Specifically, we investigate the economic significance of differences in specification and empirical validity of models. We consider three alternative econometric models of wage and price inflation in Norway. We find that differences in model specification as well as in parameter estimates across models can lead to widely different policy recommendations. We also find that the potential loss from basing monetary policy on a model that may be invalid, or on a suite of models, even when it contains the valid model, can be substantial, also when gradualism is exercised as a concession to model uncertainty. Furthermore, possible losses from such a practice appear to be greater than possible losses from failing to choose the optimal policy horizon to a shock within the framework of a valid model. Our results substantiate the view that a model for policy analysis should necessarily be empirically valid and caution against compromising this property for other desirable model properties, including robustness.Model uncertainty; Econometric modelling; Economic significance; Robust monetary policy.

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.

En effisient handlingsregel for bruk av petroleumsinntekter

Denne artikkelen undersøker hvor mye vi bør bruke av petroleumsinntektene hvis vi samtidig skal minimere kostnadene ved å bruke dem. Slike kostnader forbindes med sektoromstillinger som ikke kan opprettholdes og må reverseres for unngå intern og ekstern ubalanse i økonomien. Realvalutakursen spiller en sentral rolle når det gjelder å frembringe slike sektoromstillinger. Den reflekterer blant annet nivået på bruken av petroluemsinntektene. Den konsumraten for petroleumsinntekter som fører til minst svingninger i realvalutakursen og sektorsammensetningen, kaller vi “effisient konsumrate”. Det vises at den effisiente konsumraten blir lik realavkastningen på petroleumsformuen minus den inntektsbestemte importveksten. Vi tallfester denne raten til 1 % av den samlede petroleumsformuen. Vi finner også at den offisielle handlingsregelen tilsier større bruk av petroleumsinntekter enn det som foreskrives av den effisiente konsumraten.Petroleumsinntekter, realvalutakurs, finanspolitikk, handlingsregel

Arbitrage in the Foreign Exchange Market: Turning on the Microscope

This paper investigates the presence and characteristics of arbitrage opportunities in the foreign exchange market using a unique data set for three major capital and foreign exchange markets that covers a period of more than seven months at tick frequency, obtained from Reuters on special order. We provide evidence on the frequency, size and duration of round-trip and one-way arbitrage opportunities in real time. The analys is unveils the existence of numerous short-lived arbitrage opportunities, whose size is economically significant across exchange rates and comparable across different maturities of the instruments involved in arbitrage. The duration of arbitrage opportunities is, on average, high enough to allow agents to exploit deviations from the law of one price, but low enough to explain why such opportunities have gone undetected in much previous research using data at lower frequency.Exchange rates; arbitrage; foreign exchange microstructure

Arbitrage in the foreign exchange market: Turning on the microscope

This paper investigates the presence and characteristics of arbitrage opportunities in the foreign exchange market using a unique data set for three major capital and foreign exchange markets that covers a period of more than seven months at tick frequency, obtained from Reuters on special order. We provide evidence on the fre- quency, size and duration of round-trip and one-way arbitrage opportunities in real time. The analysis unveils the existence of numerous short-lived arbitrage oppor- tunities, whose size is economically significant across exchange rates and comparable across different maturities of the instruments involved in arbitrage. The duration of arbitrage opportunities is, on average, high enough to allow agents to exploit devia- tions from the law of one price, but low enough to explain why such opportunities have gone undetected in much previous research using data at lower frequency.exchange rates; arbitrage; foreign exchange microstructure

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

Pursuing financial stability under an inflation-targeting regime

We evaluate two main views on pursuing financial stability within a flexible inflation targeting regime. It appears that potential gains from an activist or precautionary approach to promoting financial stability are highly shock dependent. We find support for the conventional view that concern for financial stability generally warrants a longer target horizon for inflation. The preferred target horizon depends on the financial stability indicator and the shock. An extension of the target horizon favoring financial stability may contribute to relatively higher variation in inflation and output.Monetary policy, financial stability