Effects of the trilemma policies on inflation, growth and volatility in Norway

Abstract

This paper finds support for the trilemma for Norway, suggesting that the three trilemma policies – exchange rate stability, monetary independence and financial integration – have a tradeoff. Although the policy combination of exchange rate stability and monetary independence was dominant in 2010, the other two policy combinations were also prevalent in recent years. There has been a converging trend among the three trilemma policy combinations. Norway chooses a middle ground approach as represented by a managed float with adequate foreign reserves to back up, moderate monetary autonomy, and medium level of financial integration. More exchange rate stability has a positive impact on the growth rate, and more financial integration causes the inflation rate and inflation volatility to decline. More monetary independence does not affect inflation, growth and volatility.