NEMO is based on the assumption that Norway with a national currency can determine its own inflation rate over time. Therefore, a model requirement is that monetary policy anchors inflation expectations and brings inflation back to target. In the model, it is assumed that economic agents take monetary policy into account and look ahead when making decisions concerning consumption, investment, wages and prices.
NEMO is a new-Keynesian DSGE model (dynamic stochastic general equilibrium model) with Keynesian features in the short to medium term and classical features in the long term. This means that due to the stickiness of prices and wages monetary policy can influence demand and thereby output and employment in the short and medium term. In the long term, however, output is determined by technology, preferences and the supply of factor inputs. NEMO is estimated using Norwegian data as a system based on a Bayesian approach.
References
- Brubakk, L., Husebø, T. A., Maih, J., Olsen, K. and M. Østnor (2006), ”Finding NEMO: Documentation of the Norwegian economy model”, Staff Memo 2006/6, Norges Bank
- Brubakk, L. og T. Sveen (2008), “NEMO – en ny makromodell for prognoser og pengepolitisk analyse”, Penger og Kreditt 2008/1, Norges Bank
- Bache, I. W., Brubakk, L. and J. Maih (2010), “Simple rules versus optimal policy: what fits?”, Working Papers 2010/3, Norges Bank
- Lund, Kathrine and Ørjan Robstad (2012), Effects of a new monetary policy loss function in NEMO, Staff Memo 10/2012, Norges Bank