Norges Bank

Staff Memo

Norges Bank’s new monetary policy loss function – further discussion

Snorre Evjen, Norges Bank Monetary Policy, and Thea B. Kloster, Norges Bank Financial Stability.
Staff Memo

Norges Bank’s Monetary Policy Report (MPR) 1/12 introduced amendments to the criteria for an appropriate interest rate path in order to explicitly take into account the risk of a buildup of financial imbalances. The monetary policy “loss function” used in model-based analyses was accordingly adjusted mainly in two ways: The weight on the output gap was increased and a weight on the deviation between the actual and the normal interest rates was added. We present both theoretical and empirical studies underpinning these changes.

Staff Memos present reports and documentation written by staff members and affiliates of Norges Bank, the central bank of Norway. Views and conclusions expressed in Staff Memos should not be taken to represent the views of Norges Bank.

ISSN 1504-2596 (online)

Published 30 March 2012 09:00
Published 30 March 2012 09:00