Edith Cowan University
Place of Publication
Joondalup, Western Australia
Faculty of Business and Law
School of Accounting, Finance and Economics
We analyse the effectiveness of the monetary stance adopted by the Norwegian central bank in implementing monetary policy assessing how it relates to the neutral rate of interest. The neutral rate is frequently defined as the level of real interest rate consistent with both stable inflation and a level of production equal to potential production; providing no stimulus or restraint to the economy. We attempt to calculate this rate and to examine the long run link between real interest rates and inflation in Norway. We apply cointegration analysis to explore whether the gap between the real and neutral rate of interest determines the growth rate of inflation in the long run. The prevailing real interest rate is the price that equalises saving and investment and this may tend to deviate from the neutral rate due to the existence of an output gap and inflation gap in the short run. Thus we seek to find equilibrium between inflation growth and the real rate gap. Our estimate of the neutral rate lies in the range 2.7 to 3.2 per cent.