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The Monetary Approach to the Exchange Rate Determination for a “Petrocurrency”: The Case of Norwegian Krone

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Abstract

This paper, by following vector error correction modeling, empirically investigates some of the popular monetary models of the NOK/USD rate. The empirical results suggest that there is some scope for the monetary approach to explain the development of the NOK/USD during the period from 1997 to 2008. The coefficients in the co-integration equation of both money and output differentials are statistically significant and consistent with any of the forms of the monetary models. Moreover, empirical evidence for the proportionality between the exchange rate and relative money is provided. Our findings are robust across different measures of inflation expectations. Although there is no clear evidence regarding the exact version of the monetary model, the estimated unrestricted error correction models can fit the actual NOK/USD exchange rate. Finally, the short-term dynamics of the exchange rate are significantly affected by changes in crude oil prices.

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Notes

  1. The oil prices are depicted through an index, which has 2005 as base year and it is the arithmetic mean of the spot prices for three kinds of oil, Brent, West Texas Intermediate and Dubai Fateh www.indexmundi.com/commodities). In our study the oil prices are calculated in Norwegian Kroner and in real time dividing by the consumer price index in Norway.

  2. We would like to thank anonymous referee for his comment to include different inflation expectation proxies in our model.

  3. The former Global Petroleum Fund, which is managed by the Norges Bank and included as a separate item in the Bank’s balance sheet. As of 2006, the foreign assets of the Global Pension Fund amounted to USD 285 billion or 79 percent of GDP and were matched by krone deposits at the Norges Bank.

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Acknowledgments

We would like to thank the two anonymous referees, and participants of the 71st International Atlantic Economic conference held in Athens, Greece, in March 2011, for their helpful comments.

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Authors and Affiliations

  1. Department of Economics, University of Thessaly, Korai 43, 38333, Volos, Greece

    Stephanos Papadamou

  2. Department of Economics, University of Thessaly, Mantzarou 4 Str, 41221, Larissa, Greece

    Thomas Markopoulos

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  1. Stephanos Papadamou
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  2. Thomas Markopoulos
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Correspondence to Thomas Markopoulos.

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Papadamou, S., Markopoulos, T. The Monetary Approach to the Exchange Rate Determination for a “Petrocurrency”: The Case of Norwegian Krone. Int Adv Econ Res 18, 299–314 (2012). https://doi.org/10.1007/s11294-012-9360-5

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