The Impact of Monetary Policy on Leading Variables for Financial Stability in Norway

In the new CAMP working paper 02/2020, Olsen and Wieslander search for leading determinants of financial instability in Norway, and examine how these determinants respond to a monetary policy shock.  Using a Signaling Approach, they find that the wholesale funding ratio and gap, credit-to-GDP gap, house price-to-income ratio and gap, and credit growth provides good signals of future financial instability. Furthermore, with the use of Structural VAR models they find that the credit-to-GDP gap and house price-to-income ratio decrease significantly following a contractionary monetary policy shock. An important implication is that when these indicator variables increase, the central bank can use the interest rate to dampen the indicators and the probability of future financial distress. However, neither credit growth nor the wholesale funding gap responds significantly to the contractionary monetary policy shock.



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