Abstract

We study the effects of monetary policy shocks on inflation and monetary transmission in Norway, a small open economy characterized by widespread variable-rate borrowing and a floating exchange rate. Using high-frequency monetary policy surprises around Norges Bank announcements as external instruments, we estimate the effects of monetary policy shocks with Proxy SVAR and Local Projection Instrumental Variables (LP-IV) methods. Contractionary monetary policy shocks lead to a gradual and persistent decline in inflation. This result is remarkably robust across alternative instruments, identification strategies, estimation methods, and empirical specifications. The disinflationary effects are strongest for imported prices and are accompanied by an appreciation of the Norwegian krone, highlighting the importance of exchange-rate transmission. Domestic inflation, house prices, and economic activity also decline over time, indicating that both exchange-rate and demand-side channels contribute to lower inflation. Overall, the findings support the conventional view that monetary policy is effective in reducing inflation and underscore the importance of both exchange-rate and domestic transmission channels in a small open economy.