Estimating Taylor Rules for the Norwegian Inter Bank Offered Rate

We estimate forward-looking monetary policy reaction functions for Norway for the period 1999-2012. The estimation results indicate that Norges Bank has conducted monetary policy with the aim to reduce inflation deviations from target and to close output gaps. Further, the estimations suggest that keeping inflation at target is the main concern. There is also evidence of a large degree of monetary policy inertia. We find, however, the results not to be very robust to alternative variable measures and horizons, and to the inclusion of additional regressors in the monetary policy reaction function. Both foreign interest rates and housing prices are found to be significant as regressors, although the quantitative results differ for alternative variable measures. There is evidence that inflation deviations from target were closed much more aggressively in the period before the financial crisis. The results from the post financial crisis sample period suggest that other variables than inflation and the output gap were targeted as the coefficients for both of these two baseline regressors are close to zero and insignificant. However, for this sample period there are too few observations to make strong conclusions. In any case it is clear that none of the specifications considered in this thesis fully explains the variation in the interest rate, although the estimations in this thesis can give a good indication of the objectives and concerns of the Norwegian central bank