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Transition risk of a petroleum currency

Author

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  • Benedictow, Andreas
  • Hammersland, Roger

Abstract

The Norwegian krone has been persistently weak since 2017. This is not well explained by data in a standard model where the exchange rate depends on relative interest rates and prices. We extend the standard model by including a risk premium consisting of non-traditional explanatory variables, including the importance of petroleum exports, foreign direct investments and a petroleum related equity index. These variables reflect risks associated with the expected transition of the Norwegian economy which is linked to fading petroleum revenues and the green shift. The model is estimated on quarterly data from 2001, when a monetary policy of inflation targeting was implemented, up to and including 2019. We find that the weak Norwegian krone can be attributed to a higher risk premium. The risk premium is driven by oil prices and improves the model’s explanatory power.

Suggested Citation

  • Benedictow, Andreas & Hammersland, Roger, 2023. "Transition risk of a petroleum currency," Economic Modelling, Elsevier, vol. 128(C).
    • Handle: RePEc:eee:ecmode:v:128:y:2023:i:c:s0264999323003085
    DOI: 10.1016/j.econmod.2023.106496
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    More about this item

    Keywords

    Exchange rate; Exchange rate premium; Oil price; Transition risk; Cointegration; VECM analysis;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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