The dynamic effects of monetary policy shocks on the norwegian macroeconomy evidence from proxy SVAR Models
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- Master Thesis 
In this master thesis, the dynamic effects of monetary policy shocks on the Norwegian macroeconomy are examined and compared between two different types of vector autoregressive (VAR) models. The first type is the common Cholesky identified VAR, which imposes a recursive structural ordering. The second type is the proxy structural VAR (proxy SVAR) model, in which the short-run restrictions are partially identified through external instruments for monetary policy shocks. Two feedback rules, which approximate the expected part in the monetary policy of Norges Bank, are utilised to identify monetary policy shocks. But they are merely weak external instruments to identify short-run restrictions in proxy SVARs and thus, the proxy SVAR results pose the risk of a strong bias. Moreover, a financial market variable is utilised for a high frequency identification of monetary policy shocks. This method produces a sufficiently strong external instrument to identify short-run restrictions in a proxy SVAR and hence, these proxy SVAR results can be considered as reliable. In contrast to the Cholesky identified VAR, the proxy SVAR results are mostly in line with literature that evaluates monetary policy shocks in the US. These suggest monetary policy shocks lead to sluggish decreases in inflation, GDP and industrial production, and an initial strong increase in the real effective exchange rate index.