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News media vs. FRED-MD for macroeconomic forecasting
Get PDFUsing a unique dataset of 22.5 million news articles from the Dow Jones Newswires Archive, we perform an in depth real-time out-of-sample forecasting comparison study with one of the most widely used data sets in the newer forecasting literature, namely the FRED-MD dataset. Focusing on U.S. GDP, consumption and investment growth, our results suggest that the news data contains information not captured by the hard economic indicators, and that the news-based data are particularly informative for forecasting consumption developments.publishedVersio
Covered Interest Parity in long-dated securities
Get PDFThis paper investigates the validity of Covered Interest Rate Parity (CIP) in longdated fixed income securities. I show that common measures of CIP rely on trading strategies subject to rollover risk and credit risk, or fail to fully account for the trading costs. Hence, roundtrip CIP profit is generally not possible to reap when the trade is risk-free and all costs are taken into account. In particular, short-selling costs (haircuts and lending fees) and differences in funding spreads across currencies allow for substantial deviations from common measures of CIP without implying arbitrage opportunities. In contrast to recent research, my results lend little support to the view that stricter banking regulations have led to persistent arbitrage opportunities in long-dated fixed income markets.publishedVersio
Estimates of banks' losses on loans to the corporate sector
Get PDFLoans to non-financial enterprises are the main source of banks’ losses. Analyses of banks’ losses on corporate loans are therefore important in the assessment of financial stability. This paper presents Norges Bank’s framework for estimating losses on corporate loans built up from microdata for each firm and loan in each bank. Losses are estimated using a stepwise process. First, we estimate revenue developments at industry level and simulate the effect on firms’ future financial statements. This is then used to project firms’ bankruptcy probabilities using Norges Bank’s bankruptcy probability model (KOSMO). Finally, the bankruptcy probabilities are linked to data on banks’ exposures and credit losses are estimated. The estimates will be included in Norges Bank’s assessment of vulnerabilities and risks in the Norwegian banking system. In addition to being included in a general risk assessment, the framework can be used in stress testing and in the assessment of new areas of risk, such as climate risk.publishedVersio
Forvaltningen av Statens pensjonsfond utland
Get PDFSentralbanksjef Øystein Olsen. Innledning til høring om Statens pensjonsfond i Stortingets finanskomité.publishedVersio
Monetary Policy Report 1/20
Get PDFAt an extraordinary monetary policy meeting on Thursday, 12 March, analyses of the Norwegian and international economy were presented to Norges Bank’s Monetary Policy and Financial Stability Committee. The analyses are based on information up to and including Wednesday, 11 March. The Committee decided unanimously to reduce the policy rate by 0.50 percentage point to 1.00%. The Committee is monitoring developments closely and is prepared to make further rate cuts.publishedVersio
Inflation expectations and the pass-through of oil prices
Get PDFDo inflation expectations and the associated pass-through of oil price shocks depend on demand and supply conditions underlying the global market for crude oil? We answer this question with a novel structural vector autoregressive model of the global oil market that jointly identifies transmissions of oil demand and supply shocks through the real price of oil to both expected and realized inflation. Our main insight is that US households form their expectations of inflation differently when faced with long sustained increases in the price of oil, such as the early millennium oil price surge of 2003 to 2008, as compared to short and sharp price fluctuations that characterized much of the twentieth century. We also find that oil demand and supply shocks can explain a large proportion of expected and realized inflation dynamics during multiple periods of economic significance, and resolve disagreements around the role of oil prices in explaining the missing deflation puzzle of the Great Recession.publishedVersio
Norway's financial system 2020 : An Overview
No full textUpdated overview of the financial system in Norway, the tasks it performs and how it performs these tasks.publishedVersio
Mortgage regulation and financial vulnerability at the household level
Get PDFWe evaluate the impact of mortgage regulation on credit volumes, household balance sheets and the reaction to adverse economic shocks. Using a comprehensive dataset of all housing transactions in Norway matched with buyers' balance sheet information from official tax records, we identify causal effects of mortgage loan-to-value (LTV) limits. Our results show that LTV-requirements have substantial effects on credit volumes, especially on the extensive margin. As a result, such requirements contribute to dampening aggregate credit growth. We find that affected households lower their debt uptake and face lower interest expenses, thereby reducing their vulnerability to adverse shocks. However, affected households also deplete liquid assets when purchasing a home, in order to meet the new requirement. This negative effect on liquid savings persists in the years following the house purchase, suggesting that the impact on financial vulnerability at the household level is in fact ambiguous. We illustrate this further by documenting that households affected by the regulation are more likely to sell their home when becoming unemployed compared to non-affected households.publishedVersio
Delegert porteføljeforvaltning og betydningen av referanseindekser
No full textWe review the literature on portfolio delegation and examine the impact of benchmarked compensation on manager incentives, portfolio choice, and asset prices.publishedVersio
Norway’s road to inflation targeting : Overcoming the fear of floating – counterfactual analyses of four episodes
Get PDFNorway suffered from a deep recession with a systemic banking crisis in the early 1990s. The prevailing fixed exchange rate system at that time had procyclical properties. The fall of the Berlin Wall in 1989, the German reunification in the autumn of 1990 and the rebuilding of the East German Länder led to higher German interest rates. These higher interest rates put pressure upwards on the Norwegian interest rates as well and thus aggravated the Norwegian crisis. Norway changed its monetary policy regime to that of inflation targeting and flexible exchange rates around the turn of the millennium. When the financial crisis hit in 2008 and when oil prices fell in 2014, the exchange rate channel in both cases helped absorb the shock and cushion the effects on the Norwegian economy. To illustrate properties of the fixed and flexible exchange rate systems, which were in place before and after the turn of the century, respectively, we have made counterfactual analyses of four episodes. What would have happened if inflation targeting and flexible exchange rates had been introduced already in the early or mid 1990s? And, what if a fixed exchange rate regime was still in place in 2008 and 2014? We have used the macroeconomic models available in Norges Bank to conduct the aforementioned counterfactual simulations whose results are reported in Chapter 2 and 3. Chapter 2 reproduces a paper the two editors wrote already in the late 1990s based on counterfactual simulations using the bank’s main macromodel at that time, RIMINI. The results indicate how inflation targeting and flexible exchange rates might have dampened the recession in the early 1990s, allowing interest rates to be reduced during the prevailing deep recession. Chapter 3 is co-authored with Erling Motzfeldt Kravik and Yasin Mimir from the bank’s model unit and report counterfactual simulations using the bank’s current main macromodel, NEMO. The results indicate that for both episodes we have considered in the 2000s, the financial crisis in 2008 and the fall in oil prices in 2014, respectively, a return to the old fixed exchange rate regime would have incurred dramatic output costs following a substantial tightening of monetary policy in order to maintain a stable exchange rate. It should be stressed that today’s monetary policy regime works because of its established credibility and confidence in the nominal anchor, i.e. that the targeted level of inflation will be achieved in the medium term perspective. It can indeed be questioned whether such credibility was in place as early as in 1990. The accommodating policy of the devaluation decade 1976-1986 had weakened the confidence among the general public that monetary policy would deliver low and stable inflation. Thus, proposing a change in the monetary policy regime as early as in 1990 might have been interpreted as a reversion of the policy change four years earlier, and that the government, so to speak, was ”throwing the cards”. Although New Zealand as the first country had introduced inflation targeting effective from February 1990, the inflation targeting regime was in its infancy, and was yet neither well known nor well established as an alternative monetary policy regime. After all, there had been a considerable time for deliberations and for maturing the decision to move to inflation targeting in New Zealand, a process that started already in the early 1980s. Canada and Sweden followed suit and introduced inflation targeting as early as in 1991 and 1993 respectively, whereas it took another ten years before Norway introduced inflation targeting de jure in 2001. Monetary policy in a small open economy like Norway will always be constrained and the room for manoeuvre will always be limited. For example, the combination of high oil prices and low international interest rates in 2010-2014 turned out to yield procyclical outcomes, notwithstanding the fact that Norges Bank used the freedom to maintain higher interest rates than in the Eurozone. But in times of crisis Norway has been well-served by exchange rate flexibility, which made monetary policy more countercyclical when needed, thus providing important relief which helped smooth the process adapting to the global financial crisis in 2008 and the drop in oil prices in 2014. It is an open question whether the fear of floating exchange rates could have been overcome at an earlier point of time, such as in the midst of the 1990s after countries like New Zealand, Canada, Finland and Sweden had pioneered adopting inflation targeting and floating exchange rates, but the experiences from the past two decades tell us better late than never.publishedVersio