An empirical study of monetary policy shocks in Norway
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This paper aims to investigate the transmission mechanism of monetary policy under inflation targeting regime in Norway with a vector autoregression (VAR). I exploit monetary policy shocks to ensure a causal relationship between the macroeconomic variables. These structural shocks are identified through Cholesky decomposition of the variance/covariance matrix in a reduced form VAR after imposing short run restrictions. The intertemporal relationships are illustrated with impulse responses. I find that a contractionary monetary policy shock lead to a sluggish decrease in production, an immediate appreciation in the exchange rate and a temporary rise in inflation. The results indicate that monetary policy has statistically significant effect on macroeconomic variables.