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Abstract(s)
This paper examines the effect of an oil price shock on three Nordic countries, distinguishing
between oil-exporting and oil-importing countries, and how their monetary policies respond
to the shock. The central banks respond to how the oil price increase transmits through the
economy and hence an analysis of the response of other macroeconomic variables is
outlined. The channel of influence of an oil price increase may be many so a vector
autoregression (VAR) technique is chosen in order to examine the macroeconomic effects in
each country. Oil-exporting countries are expected to benefit from an oil price shock which
this study confirms. The oil-importing country also shows a positive impact on economic
activity after an oil shock, which might be due to the close ties to the oil-exporting countries
and a reduction in oil-dependency. The countries adopting flexible exchange rate regimes
are expected to experience higher increase in price level, however in Norway this is
mitigated through the “Government Pension Fund” which prevents increased oil revenues to
fuel inflation. As oil shocks are considered inflationary, all countries respond by increasing
the short term interest rate, whereas for the flexible exchange rate regimes the appreciation
of the currency is the variable offsetting the inflationary pressure.