Evolving monetary policy effects and financial turmoil In Norway : a factor-augmented VAR approach

In this paper we have analyzed how the e ects of monetary policy in Norway might have been changing over time. In particular, we have paid special attention to how the impact of policy shocks on key economic variables (such as GDP, industrial production, consumption, CPI, stock price index and employment) have evolved around the time of the bankruptcy of Lehman Brothers. By using a FAVAR framework based on a data set of 122 Norwe- gian variables and estimating the model recursively from 2000:M1 to 2014:M12, we show that the e ects of monetary policy on our vari- ables are indeed time-varying. The impulse responses of key economic variables to a monetary policy shock strengthen as we enter into a period of nancial turmoil in late-2008. In general, we nd that if a policy shock were to happen around late-2008 its cumulated impact on a variable after 50 months would be stronger than if the shock were to happen, say, before the crisis. It seems that the cumulated e ect of a policy shock is the strongest precisely during the worst moment of the crisis - the period right after bankruptcy of Lehman Brothers.