Is the price level in Norway determined by fiscal policy?

The Norwegian public sector has net financial assets. The fiscal theory of price determination applies equally to Norway and economies with net public debt: If primary surpluses evolve independently of nominal debt (or assets), the price level has to adjust to satisfy the intertemporal budget constraint of the public sector. In this ‘non-Ricardian’ regime, monetary policy cannot provide the nominal anchor. In the alternative ‘Ricardian’ regime, surpluses respond to debt, and monetary policy is the nominal anchor. The plausibility of NR regimes is disputed. I use fiscal data and oil prices to argue that the Norwegian regime is Ricardian. The fiscal theory of pricePrice-level determinacy, fiscal policy, Richardian regime, nominal anchor

Price-level determinacy, lower bounds on the nominal interest rate, and liquidity traps

We consider standard monetary-policy rules with inflation-rate targets and interest-rate or money-growth instruments using a flexible-price, perfect-foresight model. There is always a locally-unique target equilibrium. There are also below-target equilibria (BTE) with inflation always below target and constant asymptotically approaching or eventually reaching a below-target value. Liquidity traps are neither necessary or sufficient for BTE which can arise if monetary policy keeps the interest rate above a lower bound. We construct monetary-policy rules that preclude BTE, some which are monotonic in inflation but all of which are non-differentiable at a point. For standard monetary-policy rules, there are plausible fiscal policies that insure uniqueness by precluding BTE; those policies exclude perpetual surpluses and, possibly, perpetual balanced budgets.Zero bound, liquidity trap, inflation targeting, determinancy

Exchange Rate Regimes in Norway 1816-2016

An overview of exchange rate regimes in Norway since 1816 is provided in a table which is divided into five sections; corresponding to the parts of the Norwegian monetary history defined and discussed in Eitrheim, Klovland and Øksendal (2016). Measured by the frequency of formal regime changes, the two parts of history before World War I were the two most stable. Several years pass between each regime change, and nominal stability was first established and then maintained. Long lasting formal regime stability was due to the absence of large external shocks to the economy. It was also due to a modest expected role for economic policy during the periods of domestic economic stress that the country experienced. Wars and large terms of trade shocks, in addition to growing ambitions regarding policy contributions to domestic economic stability, resulted in more frequent formal regime changes during the next two parts of Norwegian monetary history, covering the period from 1914 to 1986. This period of time was also characterized by nominal volatility. Finally, the "long return" to monetary stability in the most recent period after 1986 has simultaneously represented a return to fewer formal regime changes

Is the Price Level in Norway Determined by Fiscal Policy?

The Norwegian public sector has net financial assets. The fiscal theory of price determination applies equally to Norway and economies with net public debt: If primary surpluses evolve independently of nominal debt (or assets), the price level has to adjust to satisfy the intertemporal budget constraint of the public sector. In this ‘non-Ricardian’ regime, monetary policy cannot provide the nominal anchor. In the alternative ‘Ricardian’ regime, surpluses respond to debt, and monetary policy is the nominal anchor. The plausibility of NR regimes is disputed. I use fiscal data and oil prices to argue that the Norwegian regime is Ricardian.publishedVersio

How New Keynesian Is the US Phillips Curve?

I provide a generalization of Calvo price setting, to include non-overlapping contracts as a special case and embed this in a small DSGE model. The resulting Generalized Phillips Curve (GPC) nests New-Keynesian and Neoclassical versions. I linearize the model around a potentially non-zero trend inflation rate, and estimate it on US data using Bayesian methods, allowing for Markov switching in the variances of structural shocks. I find that the Phillips curve is 100% New Keynesian. There is no evidence of either forward or backward indexation. I illustrate that trend inflation affects the estimation of the Phillips curve.publishedVersio

Banks’ wholesale funding share as an indicator of financial vulnerability

A review of theoretical links between the wholesale (or market) funding share of banks (WFS) and financial vulnerability is provided. The vulnerability may both be within the financial system, and in the non-financial sector. The historical development of the WFS in Norway is described. In light of theory and history, we provide an intuitive interpretation of why the WFS works well as an indicator of excessive credit growth in the non-financial sector and as a predictor of financial crises. We argue that other indicators, such as net aggregate household savings and households’ net financial investments, may have more intuitive links to excessive gross credit growth. These indicators predict the WFS in Norway.publishedVersio

Banks’ wholesale funding share as an indicator of financial vulnerability

A review of theoretical links between the wholesale (or market) funding share of banks (WFS) and financial vulnerability is provided. The vulnerability may both be within the financial system, and in the non-financial sector. The historical development of the WFS in Norway is described. In light of theory and history, we provide an intuitive interpretation of why the WFS works well as an indicator of excessive credit growth in the non-financial sector and as a predictor of financial crises. We argue that other indicators, such as net aggregate household savings and households’ net financial investments, may have more intuitive links to excessive gross credit growth. These indicators predict the WFS in Norway

Om nye virkemidler i pengepolitikken. Avgrensning mellom pengepolitikken og finanspolitikken

Under finanskrisen innførte mange sentralbanker nye typer utlån og kjøpte verdipapirer de vanligvis ikke handler i. Bruk av slike nye virkemidler og utvidet volum på tradisjonelle instrumenter ga større sentralbankbalanser. De nye virkemidlene kan bevege prising av verdipapirer i økonomien og slik støtte opp under pengepolitikken. Men tiltakene har også trekk av finanspolitikk ved seg.publishedVersio

Exchange Rate Regimes in Norway 1816-2016

An overview of exchange rate regimes in Norway since 1816 is provided in a table which is divided into five sections; corresponding to the parts of the Norwegian monetary history defined and discussed in Eitrheim, Klovland and Øksendal (2016). Measured by the frequency of formal regime changes, the two parts of history before World War I were the two most stable. Several years pass between each regime change, and nominal stability was first established and then maintained. Long lasting formal regime stability was due to the absence of large external shocks to the economy. It was also due to a modest expected role for economic policy during the periods of domestic economic stress that the country experienced. Wars and large terms of trade shocks, in addition to growing ambitions regarding policy contributions to domestic economic stability, resulted in more frequent formal regime changes during the next two parts of Norwegian monetary history, covering the period from 1914 to 1986. This period of time was also characterized by nominal volatility. Finally, the "long return" to monetary stability in the most recent period after 1986 has simultaneously represented a return to fewer formal regime changes

How New Keynesian Is the US Phillips Curve?

I provide a generalization of Calvo price setting, to include non-overlapping contracts as a special case and embed this in a small DSGE model. The resulting Generalized Phillips Curve (GPC) nests New-Keynesian and Neoclassical versions. I linearize the model around a potentially non-zero trend inflation rate, and estimate it on US data using Bayesian methods, allowing for Markov switching in the variances of structural shocks. I find that the Phillips curve is 100% New Keynesian. There is no evidence of either forward or backward indexation. I illustrate that trend inflation affects the estimation of the Phillips curve