Norges Bank Research Articles

Application of a single-equation SARIMA model for short-term conditional forecast (projection) of CPI price dynamics in Poland

The aim of the article is to construct an optimal SARIMA model for short-term conditional forecasting (projection) of the dynamics of prices expressed by the Consumer Price Index (CPI), as understood within the extended Box-Jenkins procedure. The construction of such a forecast aims to influence, through the expectations channel, the institutional trust of society in monetary authorities and assess the effectiveness of achieving the monetary policy goal within the framework of the democratic responsibility of the decision-making body of the National Bank of Poland – the Monetary Policy Council. The selection of the optimal SARIMA model was carried out using an iterative method within the Box-Jenkins procedure, with the goal of reducing the systematic bias of estimators – coherence with empirical data. The analysis was conducted on compiled secondary data of the monthly Consumer Price Index for goods and services from the Central Statistical Office for the years 2010-2023 (on a monthly basis). Results show that the short-term forecast demonstrated accuracy within a specified confidence interval. The application of the SARIMA model serves as a useful methodological tool for constructing elaborate DSGE models (for example, the NECMOD model) using procedures such as SEM (System for Averaging Models) from Norges Bank.

Forward guidance and expectation formation: A narrative approach

SummaryHow forward guidance influences expectations is not fully understood. To study this, I construct central bank data that includes forward guidance and its attributes, central bank projections, and quantitative easing, which I combine with survey data. I describe how, when, and where forward guidance has worked. I estimate that forecasters revised their interest rate forecasts in the intended direction by five basis points on average following a forward guidance change. I provide estimates for The Federal Reserve, European Central Bank, Bank of England, Bank of Canada, Reserve Bank of Australia, Reserve Bank of New Zealand, Sveriges Riksbank, and Norges Bank.

Norges Bank Output Gap Estimates: Forecasting Properties, Reliability, Cyclical Sensitivity and Hysteresis

AbstractThis paper documents the suite of models (SoMs) used by Norges Bank to estimate the output gap. The models are estimated using data on GDP, unemployment, inflation, wages, investment, house prices and credit. We evaluate the estimated output gap series in terms of its forecasting properties, its reliability and its cyclical sensitivity to various measures of demand and supply shocks. A simple equally weighted average of estimates from different models features a better forecasting performance than each individual model. In addition, it helps predicting inflation in pseudo real time and exhibits limited variations when new data become available. The summary measure of potential output responds strongly and rapidly to permanent shocks and to narrative measures of technology shocks but, although to a more limited extent, also to demand shocks, thus partly capturing hysteresis effects.

The No-Gold Central Banks

This article examines the central banks of three countries with no membership of the eurozone or the us-dollar zone: the ‘Bank of England’, the ’Norges Bank’ and the ‘Bank of Canada / Banque du Canada.’ It uses a descriptive, factual analysis including a short history, their structure and administrative bodies, and some key financial figures. While there are a number of similarities between the three banks e.g. on the level of administration, they differ considerably with respect to external controls and financial solidity. The ’Norges Bank’ and the ‘Bank of Canada / Banque du Canada‘ have sold all of their gold reserves, while the ‘Bank of England’ only holds a small amount compared to the size of its other assets. Hence, the no-gold banks.

Reframing Welfare: Expectations, Collaboration and Ownership at the World’s Largest Sovereign Wealth-Fund

ABSTRACT This article explores the historical emergence and current crafting of the expectation documents that Norges Bank Investment Management use to exercise ownership of the corporations in which the world’s largest sovereign wealth-fund invests. It shows how these expectations are grounded in characteristics that render sustainability an immanent issue to this fund, and how the documents emerge from collaborative relations that arise from a ‘productive incompleteness’, which enables a distinctive distributive form of agency. Sketching how the expectations enable corporations to address life and well-being around the globe, it argues that the documents reframe welfare in terms that complement yet exceed the politics and bureaucracy of the nation-state. Investigating how these processes occur through a globalising communicative field, it expands anthropological studies of finance beyond derivatives and markets to include ownership as a function of dialogue.

The Effects of COVID-19 on U.S. Small Businesses: Evidence from Owners, Managers, and Employees

We analyze a large-scale survey of small business owners, managers, and employees in the United States to understand the effects of the COVID-19 pandemic on those businesses. We explore two waves of the survey that were fielded on Facebook in April 2020 and December 2020. We document five facts about the impact of the pandemic on small businesses. (1) Larger firms, older firms, and male-owned firms were more likely to remain open during the early stages of the pandemic with many of these heterogeneities persisting through the end of 2020. (2) At businesses that remained open, concerns about demand shocks outweighed concerns about supply shocks though the relative importance of supply shocks grew over time. (3) In response to the pandemic, almost a quarter of the firms reduced their prices with price reductions concentrated among businesses facing financial constraints and demand shocks; almost no firms raised prices. (4) Only a quarter of small businesses had access to formal sources of financing at the start of the pandemic, and access to formal financing affected how firms responded to the pandemic. (5) Increased household responsibilities affected the ability of managers and employees to focus on their work, whereas increased business responsibilities impacted their ability to take care of their household members. This effect persisted through December 2020 and was particularly strong for women and parents of school-aged children. We discuss how these facts inform our understanding of the economic effects of the COVID-19 pandemic and how they can help design policy responses to similar shocks. This paper was accepted by Tomasz Piskorski, finance. Funding: The authors thank the Norges Bank Investment Management for funding through a grant to the Volatility and Risk Institute atNew York University, Stern School of Business. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2022.4327 .

Norway

While Norway’s institutional arrangement for macroprudential policy is uncommon, the authorities have shown strong willingness to act. The Ministry of Finance (MoF) is the sole macroprudential decision-maker in Norway, which is rare in international comparison. However, Norges Bank and the Finanstilsynet (FSA) play important advisory roles. In recent years, the authorities have taken substantive and wide-ranging macroprudential policy actions in response to growing systemic vulnerabilities—and these seem to have been effective in slowing down some of the riskier trends. The macroprudential policy toolkit is well stocked and actively used.

Norway

Norwegian banks and other financial institutions rely heavily on capital markets for liquidity and risk management. Liquidity conditions in the Norwegian financial sector are affected by central bank operations and the lending and funding activities of financial institutions, both domestically and abroad. Nearly 40 percent of the funding of Norwegian banks is obtained from market sources, using commercial paper, covered bonds, and senior unsecured bonds issued both domestically and abroad. Correspondingly, money markets, foreign exchange (FX) swap markets and bond markets are crucial to the credit intermediation process and a dislocation in these markets—the inability of financial institutions to roll over, or obtain new, funding—could have significant consequences for financial stability. Against this background, this note analyzes core funding markets for Norwegian banks and assesses Norges Bank’s capacity to manage systemic liquidity conditions and counteract liquidity shocks in normal times and in times of stress.

Trading Transparency: At What Speed and Cost?

This paper summarizes the discussions that took place at a recent one-day listening conference on this and related questions hosted by Columbia Business School's Program for Financial Studies and sponsored by a grant from Norges Bank Investment Management under the Norwegian Finance Initiative (NFI). It was held on June 14, 2018 in New York. The conference was structured as a series of panels that were moderated by academics and comprised regulators, researchers and market participants from the buy side and sell side. There were separate panels on the fixed income markets, equity markets, public versus private markets, technology and innovation, clearing and settlement, and regulation, and the discussions took place under Chatham House rules.

Identification of Interbank Loans and Interest Rates from Interbank Payments - A Reliability Assessment

We investigate the reliability of the 'Furfine filter' often used to identify interbank loans and interest rates from interbank payments settled at central banks. To this end, we have been granted access to records of all unsecured overnight interbank loans during a month from the banks that participated in Norges Bank's real-time gross settlement system. The filter applied was able to identify each of these loans and correctly derive the associated interest rates. The filter's reliability is also supported by additional evidence based on the Norwegian Overnight Weighted Average (NOWA) interest rates beyond the survey month. Sensitivity analyses suggest the share of false or overlooked loans may remain small if the filter design largely incorporates interbank market conventions regarding loan size requests and interests rate quotes.

Identification of interbank loans and interest rates from interbank payments: a reliability assessment

We investigate the reliability of the “Furfine filter” often used to identify interbank loans and interest rates from interbank payments settled at central banks. To this end, we have been granted access to records of all unsecured overnight interbank loans during one month from the banks that participated in Norges Bank’s real-time gross settlement system. The filter applied was able to identify each of these loans and correctly derive the associated interest rates. The filter’s reliability is supported by additional evidence based on the Norwegian overnight weighted average (NOWA) interest rates beyond the survey month. Sensitivity analyses suggest the share of false or overlooked loans may remain small if the filter design incorporates interbank market conventions regarding loan size requests and interest rate quotes.

Facilitating Climate-Smart Investments

The financial sector will play a key role in transitioning toward low-carbon and climate-resilient development, but financial decision makers need tailored information to guide climate-smart investment decisions. Here, we reflect upon the Sustainable Edge report and investor engagement to pilot a new approach to climate-risk assessment for companies.

Practical Applications of Useful Money and Cryptocurrencies

Practical Applications Summary Cryptocurrencies’ attempts to replace the operations of traditional financial institutions has led to several fundamental questions about their plausibility, both as a type of money and as a payment system. In Useful Money and Cryptocurrencies, from the 2019 Cryptocurrency Special Issue of the Journal of Investing, authors Jon Nicolaisen and Peder Ostbye (both of Norges Bank in Oslo, Norway) address whether cryptocurrencies can truly function as useful money; whether they can improve payment systems; what their risks are; and what regulation they may face.

What kind of payments settle in a real time gross settlement system? The case of Norges Bank’s settlement system (NBO)

What kind of payments settle in a real time gross settlement system? The case of Norges Bank’s settlement system (NBO)

Blurring the Borders. How the Central Banks of the European Neutrals During the First World War Became Part of the State Machinery: Examining the Case of Norway

This article analyses the relationship between the central banks and governments in the neutral countries during the First World War, with focus on the Norwegian development. It examines how independence was challenged, and the framework is a concept of central bank independence, which regards non-lending to the state as vital to the functioning of the central banks. This is a novel approach to the development during the war as the perspective has barely been discussed in the literature in Norway, and also seems to be disregarded in the standard international literature on central bank development. From this perspective the article argues that the Norwegian central bank’s pre-war independence was substantial compared to other central banks. Moreover, the distinct borders between central bank and government also safeguarded Norges Bank’s autonomy longer than in comparable countries after the outbreak of war. However, by the end of the war, Norges Bank had become one of the neutral central banks most interwoven with the state. Based on the historical development in different countries, the article questions the notion of the standard literature that lending to the state in a crisis was a central bank duty.

A Review of Norges Bank's Active Management of the Government Pension Fund Global

We have reviewed Norges Bank’s active management of the Government Pension Fund Global, referred to simply as the “Fund.” The absolute performance of the Fund is almost entirely determined by the benchmark choice set by the Ministry of Finance (the asset owner) and is dominated by equity risk. In this sense, the Fund can be viewed as a mega index fund. However, the Fund also deviates from its benchmark and pursues active management. These deviations stem from various investment strategies, such as factor investing, internal and external security selection, trading strategies based on opportunities arising from market imperfections and liquidity provisioning, and real estate investments. In this sense, the Fund can be viewed as akin to a mega index fund, enhanced by its active management. The relative performance of the Fund (i.e., the return difference between the Fund and its benchmark, also referred to as the active return) is 0.20% per year after costs. In terms of the Fund’s value added after costs, this corresponds to a transfer to the asset owner (and ultimately the Norwegian people) of NOK 30–50 billion over the 2013–2017 period, depending on how we adjust and credit risk taking. The lion’s share of the value added comes from the Fund’s equity portfolio. While it is difficult for us to assess each strategy’s contribution to the Fund’s total performance, a return decomposition suggests that the mean active return is due to security selection rather than market timing and, in particular, that the Fund has been able to choose outperforming external managers that contribute substantially. We also find that activities related to the indexing (e.g., asset positioning and securities lending) contribute to the total return, mitigating the Fund’s costs of passively managing the assets. In line with our mandate, the executive summary highlights the main findings and concludes with recommendations.

Investment Ethics and the Global Economy of Sports: The Norwegian Oil Fund, Formula 1 and the 2014 Russian Grand Prix

As a sovereign wealth fund, the $1 trillion Norwegian Government Pension Fund-Global (‘the Oil Fund’), which is managed by Norges Bank Investment Management on behalf of the welfare of Norway’s citizens, is supposed to be a flagship for socially responsible investments through its Council of Ethics. However, its investment in Delta Topco, the holding company of Formula 1 world championship that, through Formula One Group, brokered a deal with Russia to host a Formula 1 Grand Prix in 2014, raises the question of whether the Oil Fund should enhance its due diligence processes. Although no evidence of corruption related to the race is introduced, the complex relation between financial logic and the world of sports still raises questions about the ethical solidity of the Oil Fund’s investment. Drawing upon reports of the relationship between political economy and sporting events, this paper therefore analyses, in light of the Oil Fund’s ethical guidelines, the complexities of its investment in Delta Topco. As a result, it is argued that a new set of examination methods by the Council of Ethics may be warranted.

The Gold War: the dissolution of the Scandinavian Currency Union during the First World War

ABSTRACT This article explains how the outbreak of the First World War resulted in the de facto dissolution of the Scandinavian Currency Union. Up until the First World War, the union among the central banks of Denmark, Norway and Sweden is considered to be a success. However, the outbreak of war brought cooperation to its knees. The article rejects two conventional perspectives on the break-up of the union. Firstly, that Denmark's and Norway's greater monetary expansion was pivotal to the break-up, whilst Sweden pursued a more prudent monetary policy. In contrast, the article argues that the disintegration of the union is better understood by the implementation of a unilateral Swedish gold blockade policy, influenced by Swedish economic theorists. Secondly, that Sweden in April 1917 finally solved her problem of continued gold inflows by threatening to withdraw from the union. Quite conversely, it is argued that Swedish the Riksbank had to give up her hard line, because Norwegian Norges Bank throughout 1917 forced through gold shipments to pay for Norway's trade deficit, which resulted in a virtual Gold War between the two countries. The scramble for resources saw cordiality being replaced by distrust, whilst national needs overrode any hope of cooperation.

The Value Relevance of Corporate Sustainability Disclosures: An Analysis of a Dataset from One Large Asset Owner

Corporate environmental and social reporting lacks the comparability across companies that is a characteristic of financial information. To address this weakness, Norges Bank Investment Management (NBIM) created analytical frameworks to measure the quality and scope of reporting relating to three focus areas: climate change, water and children’s rights. By translating information published by a global set of companies into standardized data, NBIM has constructed a dataset that can be used for analyzing and comparing companies across time and within sectors. The purpose of this project is to understand the value relevance of NBIM’s dataset. First, we model the determinants of the disclosure scores and climate change performance score. Consistent with prior literature, we find that firms that are larger, higher growth, less closely held and with higher analyst coverage tend to disclose more. We find that the climate change performance score is less a function of observable firm characteristics and is more idiosyncratic. This highlights the different dynamics of measures that capture actual performance, versus metrics that capture disclosures of efforts. Next, we take the ‘residual’ scores – the part of the scores that is uncorrelated with observable firm characteristics, industry and country membership – and test for associations with future financial performance. Across all of our models, the residual disclosure score is not robustly correlated with any metric of future financial performance. However, we find that the residual component of the climate change performance score is significantly related to future financial performance. We find even stronger associations for the subset of firms that have above median exposure to climate change risks. We perform supplementary analysis to understand the motivation behind these disclosures. We find that some firms choose to disclose more because they are currently facing more problems, as measured by the level of negative media attention that the firm receives on the focal issue. We also find that firms disclosing more in the past received more negative media attention on that focal issue in the future. These results hold after controlling for factors, such as firm size, that influence both media attention and disclosure levels. This suggests that higher disclosure around an issue is not necessarily indicative of better current or future performance on the issue but in some cases, it is a signal of future bad news. Conversely, we find a negative relation between the climate change performance score and the current level of negative media attention, suggesting that this performance measure indeed captures meaningful efforts to manage climate-related risks.

Order flow information and spot rate dynamics

This paper examines why order flows are empirically important drivers of spot exchange rate dynamics. We consider a decomposition for the depreciation rate that must hold in any model and show that order flows will appear as important proximate drivers when they convey significant incremental information about future interest rate differentials, risk premiums and/or long-run exchange rate levels (i.e., information that cannot be inferred from publicly observed variables). We estimate the importance of these incremental information flows for the EURNOK spot exchange rate using eight years of high-quality, disaggregated, end-user order flow data collected by the Norges Bank.