The NOK/euro exhange rate after inflation targeting: The interest rate rules
AbstractNorway 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.
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Bibliographic InfoPaper provided by Research Department of Statistics Norway in its series Discussion Papers with number 501.
Date of creation: May 2007
Date of revision:
monetary policy regime shift; NOK/euro exchange rate; role of interest rates; equilibrium real exchange rate; purchasing power parity; uncovered interest parity;
Find related papers by JEL classification:
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- F31 - International Economics - - International Finance - - - Foreign Exchange
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-05-19 (All new papers)
- NEP-CBA-2007-05-19 (Central Banking)
- NEP-EEC-2007-05-19 (European Economics)
- NEP-MAC-2007-05-19 (Macroeconomics)
- NEP-MON-2007-05-19 (Monetary Economics)
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