Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/192483 
Year of Publication: 
2007
Series/Report no.: 
Discussion Papers No. 501
Publisher: 
Statistics Norway, Research Department, Oslo
Abstract: 
Norway adopted a flexible inflation target in March 2001 following a long period with exchange rate targeting in various forms. The regime shift reverses the causal ordering between changes in the nominal exchange rate and changes in the interest rate. When the central bank targets the exchange rate, interest rates are rarely changed independently of foreign interest rates and only to counteract large movements in the exchange rate after interventions have failed to stabilise the exchange rate. With inflation targeting the interest rate is used to stabilise the domestic economy and has a strong impact on the exchange rate. The long run (steady state) relationship between the interest rate and the exchange rate is on the other hand not altered by the change in monetary policy regime. This means that the fundamental equilibrating mechanism - that is the PPP condition augmented with a risk premium - remains the same across regimes.
Subjects: 
monetary policy regime shift
NOK/euro exchange rate
role of interest rates
equilibrium real exchange rate
purchasing power parity
uncovered interest parity
JEL: 
C51
C52
C53
E42
F31
Document Type: 
Working Paper

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