The aim of this research is to check whether the Taylor rule in its simple linear form can be viewed as an appropriate description of the monetary policy pursued by Norway’s central bank – Norges Bank, and whether this rule can be used for forecasting purposes.
Not only does this research focus on the original Taylor rule, but it also deals with its extended version designed for small open economies such as Norway. A conclusion about whether regressions can produce reliable coefficient estimates is drawn on the basis of time series’ properties tests and cointegration tests. The performance of the simple-form Taylor equation is compared to its alternative forms through forecasting exercises.
The study has shown that the extended version of the Taylor rule with interest rate smoothing and augmented with the real exchange rate, the policy rate of the EU and oil prices can be viewed as a close approximation of Norges Bank’s monetary policy and can be used for forecasting purposes.
Source: Uppsala University
Author: Balabay, Oksana