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Europe > Norway

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Cover IMF Staff Country Reports
Norway: 2024 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Norway
International Monetary Fund. European Dept.
The 2024 Article IV Consultation discusses that boosting labor supply, containing public expenditure pressures, and raising productivity will be required for Norway to be able to continue its strong economic performance and preserve its welfare model. A recent White Paper by the Ministry of Finance rightly raises these key issues facing Norway’s economy in the longer term. Real gross domestic product growth slowed in 2023 and is expected to gradually rebound in the near term as private domestic demand strengthens supported by higher real incomes. Tight macroprudential policies should remain in place to mitigate systemic vulnerabilities. The financial system appears resilient and banking system buffers are strong. Long-term fiscal challenges should be more forcefully addressed. Norway has the largest proportion of the population on disability-related benefits among the organisation for economic co-operation and development countries, and reforming costly and distortionary social benefit systems is possibly the most important and politically difficult reform pending. Although Norway boasts one of the highest levels of labor productivity among its peers, it has slowed faster than in other countries. To reverse this trend, conditions should be improved to facilitate sectoral reallocation as well as innovation and technology adoption.
Keywords:
inflation expectation; holdings of SDR; monetary policy stance; inflation pressure; consumer price inflation; Inflation; Labor markets; Central bank policy rate; Global
Cover IMF Working Papers
Central Bank Exit Strategies Domestic Transmission and International Spillovers
Christopher J. Erceg
,
Marcin Kolasa
,
Jesper Lindé
,
Haroon Mumtaz
, and
Pawel Zabczyk
We study alternative approaches to the withdrawal of prolonged unconventional monetary stimulus (“exit strategies”) by central banks in large, advanced economies. We first show empirically that large-scale asset purchases affect the exchange rate and domestic and foreign term premiums more strongly than conventional short-term policy rate changes when normalizing by the effects on domestic GDP. We then build a two-country New Keynesian model that features segmented bond markets, cognitive discounting and strategic complementarities in price setting that is consistent with these findings. The model implies that quantitative easing (QE) is the only effective way to provide monetary stimulus when policy rates are persistently constrained by the effective lower bound, and that QE is likely to have larger domestic output effects than quantitative tightening (QT). We demonstrate that “exit strategies” by large advanced economies that rely heavily on QT can trigger sizeable inflation-output tradeoffs in foreign recipient economies through the exchange rate and term premium channels. We also show that these tradeoffs are likely to be stronger in emerging market economies, especially those with fixed exchange rates.
Keywords:
Monetary Policy; Quantitative Easing; International Spillovers; asset purchase; central bank exit strategies; inflation surge scenario; Policy conduct; appendix E. term premium; open economy; Central bank policy rate; Inflation; Unconventional monetary policies; Bonds; Exchange rate arrangements; Global
Cover IMF Staff Country Reports
Sweden: Selected Issues
International Monetary Fund. European Dept.
This Selected Issues paper analyzes inflation developments, drivers, and risks in Sweden. Inflation in Sweden started rising sharply from June 2022. Using dynamic simulations of an estimated Sweden-specific Phillips curve (PC), the team assess the role of external factors in driving recent inflation. Several factors that are poorly captured in the PC analysis, may account for the rise in unexplained inflation. Illustrative risk scenarios confirm a wide range of possible inflation paths on either direction. Renewed commodity price shocks and smaller-than-estimated slack could delay the return of inflation to target. Increasing inflation expectations, including because of renewed exchange rate pressures, would also feed into higher inflation. Core inflation could be sticker if the price setting becomes de-anchored or more backward looking. Growth in the gross domestic product deflator (as one measure of inflation) can be decomposed into three components—profits, labor costs, and taxes—to assess inflationary pressures in the economy.
Keywords:
Citi Sweden inflation surprise Index; EA inflation driver; inflation expectation; monetary policy transmission; inflation development; Inflation; Unconventional monetary policies; Currencies; Consumer price indexes; Nominal effective exchange rate; Global
Cover IMF Staff Country Reports
Ireland: Selected Issues
International Monetary Fund. European Dept.
This Selected Issues paper provides an international perspective to the authorities’ two recent policy measures: setting up new savings and counter cyclical and climate infrastructure funds and reforming the judicial review of planning decisions in Ireland. The first essay presents international best practices in the design and operation of sovereign wealth funds that could inform the setup of the two new funds in Ireland. It highlights the importance of operating the funds within a strong fiscal policy framework. The second essay reviews Ireland’s planning and permitting system, underscoring the key elements that have hindered public investment. It also looks into the government’s proposed Bill to reform the planning system and contrasts its key features with those of other international jurisdictions. It finds that several issues may contribute to the inefficiencies in the planning and judicial review system, such as the loose standing requirements and lack of mandatory timelines related to judicial review, as well as institutional governance issues within the planning board, which the newly proposed reforms and legislative measures seek to address.
Keywords:
housing affordability; D. policy option; savings fund; modernizing judicial review; impulse response; Housing; Housing prices; Pension spending; Global
Cover IMF Working Papers
A New Fiscal Framework for Resource-Rich Countries
Mr. Luc Eyraud
,
William Gbohoui
, and
Mr. Paulo A Medas
This paper revisits the debate on the design of fiscal rules in resource-rich countries. Its main objective is to assess alternative systems of rules against their policy objectives, while taking into account country characteristics. One of the contributions of the paper is to propose fiscal frameworks that are centered around the principle of insurance against shocks and less reliant on estimating precisely resource wealth, which tends to be highly volatile.
Keywords:
Fiscal Policy; Fiscal Rules; Non-Renewable resources; Resource Funds; Nonrenewable Resource Exporting Countries; resource wealth; personal income hypothesis; financial assets floor; IMF working paper 23/230; net financial assets; policy objective; resource revenue; Natural resources; Commodity prices; Global
Cover IMF Working Papers
Micro-Assessment of Macroprudential Borrower-Based Measures in Lithuania
Mantas Dirma
and
Jaunius Karmelavičius
Despite having introduced borrower-based measures (BBM), Lithuania's housing and mortgage markets were booming during the low-interest-rate period, casting doubt on the macroprudential toolkit's ability to contain excessive mortgage growth. This paper assesses the adequacy of BBMs’ parametrization in Lithuania. We do so by building a novel lifetime expected credit loss framework that is founded on actual loan-level default and household income data. We show that the BBM package effectively contains mortgage credit risk and that housing loans are more resilient to stress than in the preregulatory era. Our BBM limit calibration exercise reveals that (1) in the low-rate environment, income-based measures could have been tighter; and (2) borrowers taking out secondary mortgages rightly are and should be required to pledge a higher down payment.
Keywords:
macroprudential policy; borrower-based measures; LTV; mortgage credit risk; lifetime expected loss; probability of default.; calibration exercise; BBM package; modeling mortgage risk; Lithuania's housing market; Mortgages; Loans; Credit risk; Housing prices; Macroprudential policy instruments; Europe; Baltics; Global
Cover IMF Staff Country Reports
Norway: 2023 Article IV Consultation-Press Release; and Staff Report
International Monetary Fund. European Dept.
The 2023 Article IV Consultation discusses that Norway grew strongly in 2022 but the pace of output growth receded somewhat this year. Record-high energy and food prices together with much higher interest rates put pressure on households’ purchasing power. Nonetheless, mainland gross domestic product growth is still expected to be positive, supported by strong business investment and exports. Norway experienced one of the highest growth rates among advanced economies last year, and risks remain balanced. Growth is continuing but at a more modest pace. The country has experienced windfall gains from high petroleum and natural gas prices that have so far countered global headwinds. The banking system is strong but tightening global conditions pose risks. Risks to financial stability appear to be broadly manageable, but continued vigilance is needed given the heightened uncertainty. Progress on structural reforms has been piecemeal. Some steps have been taken in further upskilling the workforce, including increased vocational training and the planned introduction of a youth guarantee scheme.
Keywords:
money market rate; inflation risk; liability positions vis-a-vis nonresident; inflation expectation; mainland GDP growth; Inflation; Fiscal stance; Central bank policy rate; Consumption; Labor markets; Global
Cover IMF Staff Country Reports
Norway: 2022 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Norway
International Monetary Fund. European Dept.
The economy bounced back strongly from the first wave of Covid-19 pandemic, and the recovery is well entrenched in 2022. However, risks to the outlook are considerable, given the uncertainty over spillovers from the war in Ukraine, the intensity of the pandemic globally, and in Europe, in particular, and supply bottlenecks. Given the strong fundamentals, Norway is relatively shielded and there are both upside (higher energy prices and export volumes) and downside risks (lower demand from Europe for non-energy exports). The forecast is especially sensitive to where energy prices settle, whether energy supply to Europe will be disrupted, and Norway’s capacity to increase gas supplies to Europe.
Keywords:
liability positions vis-à-vis nonresident; money market rate; inflation pressure; normalising economy; core inflation; Inflation; Mortgages; Climate change; Global; Europe
Cover IMF Working Papers
Are Climate Change Policies Politically Costly?
Davide Furceri
,
Michael Ganslmeier
, and
Mr. Jonathan David Ostry
Are policies designed to avert climate change (Climate Change Policies, or CCPs) politically costly? Using data on governmental popular support and the OECD’s Environmental Stringency Index, we find that CCPs are not necessarily politically costly: policy design matters. First, only market-based CCPs (such as emission taxes) generate negative effects on popular support. Second, the effects are muted in countries where non-green (dirty) energy is a relatively small input into production. Third, political costs are not significant when CCPs are implemented during periods of low oil prices, generous social insurance and low inequality.
Keywords:
EPS change; policy design; Policy implication; popular support; baseline model; Climate change; Climate policy; Fuel prices; Environmental policy; Natural disasters; Global
Cover IMF Working Papers
Climate-Related Stress Testing: Transition Risks in Norway
Pierpaolo Grippa
and
Samuel Mann
This paper explores three possible transmission channels for transition risk shocks to the financial system in Norway. First, we estimate the direct firm-level impact of a substantial increase in domestic carbon prices under severe assumptions. Second, we map the impact of a drastic increase in global carbon prices on the domestic economy via the Norwegian oil sector. Third, we model the impact of a forced reduction in Norwegian oil firms’ output on shareholder portfolios. Results show that such a sharp increase in carbon prices would have a significant but manageable impact on banks. Finally, the paper discusses ways to advance the still evolving field of transition risk stress testing.
Keywords:
Climate change; transition risk; carbon emissions; carbon price; environmental policy; asset pricing; financial stability; WP; balance sheet approach; emissions data; low-carbon economy; enterprise value; Carbon tax; Oil sector; Oil; gas and mining taxes; Oil prices; Greenhouse gas emissions; Global