Evaluation Of Norwegian Monetary Policy

The independent research committee, Norges Bank Watch, have released their annual evaluation of Norwegian monetary policy, conducted by the Central Bank of Norway. The committee considers the Central Bank’s assessment of the Norwegian economy over all to be well balanced in the first half of 2009, but have a few remarks on credibility and transparency.

“It was good luck that the oil price (in USD) doubled in the course of 2009.”

Norges Bank Watch


Why are the Norwegian central bank‘s inflation forecasts persistently higher than the ones from the Norwegian Bureau of  Statistics?

The research committee, Norges Bank Watch, does not provide an answer to the question, but says it is “surprised” by the fact.

“A comparison of the forecasts by Norges Bank with those by Statistics Norway show that already in the beginning of 2009, both institutions quickly understood that the Norwegian recession would be much milder than the great international recession. However, there has been a clear (and to us surprising) tendency that Statistics Norway forecast a persistently lower inflation than Norges Bank for the period 2009 – 2011,” Norges Bank Watch writes in the 2009-edition, released recently.

Dumb Luck?

“The international financial crisis did temporarily cut off many Norwegian banks from international funding, but this problem was manageable, and was fixed without any sizeable credit crunch. Finally it was good luck that the oil price (in USD) doubled in the course of 2009 and that the Norwegian manufacturing sector is relatively small, quite capital intensive, and not much involved in producing consumer durables.”

The committee has evaluated monetary policy in the first half of 2009 as being part of the Norwegian authorities’ management efforts to counter the negative effects of the financial crisis on the Norwegian economy.

These were followed by an “exit strategy” phase in which Norges Bank began to signal a return to higher rates, as it scaled back the crisis measures and eventually started to hike rates in October.

“The central bank’s rhetoric and actions in the period since the August interest rate meeting have been part of this exit strategy, in our view.”

“After evaluating Norges Banks monetary policy, the committee considers Norges Banks assessment of the Norwegian economy over all to be well balanced in the first half of 2009. The two rate cuts in February and March reflected well the deterioration of the outlook of the Norwegian economy.”

“The committee would like to give Norges Bank credit for a quick and successful communication to the private sector when Norges Bank changed its view on the outlook for the Norwegian economy in August.”

“In the committee’s view, the October rate hike reflected well the more optimistic outlook of the Norwegian economy signaled by Norges Bank since August. Although the rate hike in December was somewhat surprising to the private sector, the committee believes it was appropriate to increase rates due to the lack of pass-through of of the previous rate hike to bank lending rates and a more favorable outlook of the economy.”

Okay, it’s a B+

Norges Bank Watch thinks the central bank in general have done a good job in handling “The Great Recession”.

But the committee have a few remarks of credibility and transparency.

Norges Bank has the last few years approached the frontier in monetary policy transparency by publishing the projected interest rate path.

Since the effect of a monetary policy decision depends on expected future decisions, the projected policy path is an integral part of the monetary policy stance.

“Only on the three occasions that they publish the Monetary Policy report do they update the forecasts.”

“The NBW committee suggests that Norges Bank keeps the number of monetary policy reports to three per year, but consider publishing a press release and a monetary policy update at least on one of the other meetings of the Executive Board. The monetary policy update should contain a limited number of forecasts for central macroeconomic variables.”

One (more) Voice?

“Currently, Norges Bank has decided to “speak with only one voice”. This has implied that only internal members (the Governor and Deputy Governor) have discussed the monetary policy decisions or issues related to the operation of monetary policy in public. We suggest that also the external members should be able to discuss issues related to the operation of monetary policy in public. This would contribute positively to the current debates about monetary policymaking in Norway.”

Here the executive summary.

Here’s a copy of the full report.

Governor Svein Gjedrem gives a speech at The Peterson Institute for International Economics in Washington, D.C, Thursday.

The speech will be published here at the Econotwist’s Blog at 7 pm, Norwegian time.

Related by the Econotwist:

Central Bank of Norway: “Transparency Is Difficult”

“The Norwegian Syndrome”

Norway’s New Bubble

Norges Bank urges banks to reduce liquidity risks

Reason To Worry

Norway: Most Banks Fail In Stresstest

C.B.of Norway: “All Banks Must Be Allowed To Fail”

Central Bank of Norway raise interest rate again

Fear Of Norwegian Housing Market Collapse

Norway: Key Policy Rate Remains Unchanged

Nordic Central Banks Agree On Baltic Bank Bailout

Final Words Of A Central Banker

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