by Øyvind Eitrheim and Jan Fredrik Qvigstad, Norges Bank.
Norway suffered from a deep recession with a systemic banking crisis in the early 1990s. The prevailing fixed exchange rate system at that time had procyclical properties. Norway changed its monetary policy regime to that of inflation targeting and flexible exchange rates around the turn of the millennium. When the financial crisis hit in 2008 and when oil prices fell in 2014, the exchange rate channel in both cases helped absorb the shock and cushion the effects on the Norwegian economy. It is an open question whether the fear of floating exchange rates could have been overcome at an earlier point of time. However, the experiences from the past two decades tell us better late than never. Continue reading