Shaken or Stirred? Financial Deregulation and the Monetary Transmission Mechanism in Norway.

We address the issue of how the deregulation of financial markets has affected the monetary transmission mechanism in Norway. By estimating a dynamic system of money, credit, real income and inflation during a period of fundamental structural changes in monetary policy and financial markets we are able to present empirical evidence on the tenacity of the relationships between financial and real variables. We first investigate the stability of the long-run demand functions for money and credit by means of recursive techniques for cointegrated systems. The long-run relationships turn out to be surprisingly resilient in our model; the deregulation process does not cause any permanent shifts in the relationships between financial quantity variables, real economic activity and prices. Within a small simultaneous dynamic model of the Norwegian economy we find evidence for the credit view of the monetary transmission mechanism, as both credit and money exhibit strong and stable effects on aggregate demand.