INTEGRATING FINANCIAL STABILITY AND MONETARY POLICY ANALYSIS
GOVERNOR ØYSTEIN OLSEN
27 APRIL 2015
2
Unemployment Inflation
House prices Household debt ratio
Sources: Thomson Reuters and Norges Bank
-2.5 0 2.5 5 7.5
-2.5 0 2.5 5 7.5
2008 2009 2010 2011 2012 2013 2014 2015 0
2 4 6 8 10 12 14
0 2 4 6 8 10 12 14
2000 2002 2004 2006 2008 2010 2012 2014
US UK
Euro area Norway
100 150 200 250 300
100 150 200 250 300
2000 2002 2004 2006 2008 2010 2012 2014
60 100 140 180
60 100 140 180
2000 2002 2004 2006 2008 2010 2012 2014
Basis for advice on CCB: key indicators
50 100 150 200
50 100 150 200
1976 1986 1996 2006
Source: Norges Bank 3
House prices / disposable income Credit / GDP
Real commercial property prices Banks` wholesale funding ratio
50 100 150 200
50 100 150 200
1976 1987 1998 2009
0 20 40 60
0 20 40 60
1976 1984 1992 2000 2008
50 100 150 200
50 100 150 200
1976 1986 1996 2006
0 0.2 0.4 0.6 0.8 1
0 0.2 0.4 0.6 0.8 1
1980 1987 1994 2001 2008
Early warning models for financial crises
4
US UK
Norway Spain
0 0.2 0.4 0.6 0.8 1
0 0.2 0.4 0.6 0.8 1
1980 1987 1994 2001 2008
0 0.2 0.4 0.6 0.8 1
0 0.2 0.4 0.6 0.8 1
1980 1987 1994 2001 2008
0 0.2 0.4 0.6 0.8 1
0 0.2 0.4 0.6 0.8 1
1980 1987 1994 2001 2008
Increased capital requirements in Norway
CET1 capital. Percent. 1 July 2013 – 1 July 2016
Sources: Ministry of Finance and Norges Bank 5
4.5 4.5 4.5 4.5
2.5 2.5 2.5 2.5
2.0 3.0 3.0 3.0
1.0 2.0
1.0
1.0
0 2 4 6 8 10 12 14 16
0 2 4 6 8 10 12 14 16
1 July 2013 1 July 2014 1 July 2015 1 July 2016
Countercyclical buffer
Buffer for systemically important banks Systemic risk buffer
Conservation buffer Minimum requirement
Framework
Loss function, L: L
0= 𝐸
0∑
∞𝑡=0δ
𝑡(π
𝑡2+ λ𝑦𝑡
2)
where π
t= inflation deviation from inflation target
𝑦
t= output gap
Demand, 𝑦
𝑡: 𝑦
𝑡= 𝑓(𝑟
𝑡, … ) − 𝑧
𝑡Impulse from financial instability, 𝑧
𝑡: 𝑧
𝑡= β ∙ 𝑧
𝑡−1+ α ∙ FI
t𝛼 = � 0 if financial instability does not arise 1 if financial instability arises Level of financial imbalances, FI
t: FI
t= 𝑔(𝑟
𝑡, … )
6
Financial stress does not arise
0 6 12 18 24 30 36
Output gap
0 6 12 18 24 30 36
Inflation
Does not take risk into account Takes risk into account
0 6 12 18 24 30 36
Real interest rates
0 6 12 18 24 30 36
Financial imbalances
7
Financial stress arises
0 6 12 18 24 30 36
Output gap
Does not take risk into account Takes risk into account
0 6 12 18 24 30 36
Inflation
0 6 12 18 24 30 36
Real interest rates
0 6 12 18 24 30 36
Financial imbalances
Financial stress arises
8
