Model based economic analysis

Normetrics is an interface to research and consulting work based on econometric modelling, in particular to the development and use of the Norwegian Aggregate Model (NAM).

CO2 forecast update: January 2020

The longest time series for atmospheric CO2 is for the Pacific island of Mauna Loa. Based on this time series, the development of the CO2 level can be forecasted on a monthly basis.

Figure 1 shows that the CO2 level is expected to continue its typical cyclical evolution in combination with secular growth.  

Forecasted CO levels (upper panel) 2020(1)-2021(12) and growth rates (lower panel)

The next figure shows the actual CO2 measurement from 2019 together with the family of forecasts produced so far. Staring with the projection from September 2019 and ending with the current January 2020 forecast.

Actual Atmospheric CO2 (red solid line) and a family of five projections. The oldest starts in September 2019 and the newest in January 2020 (the current forecast).

There is not a lot of differences between the five projections. The graphs show that the forecast from September 2019 has under-predicted CO2 evolution in the four last months of 2019 somewhat. The three other forecast from 2019 appear to be very precise (but there are also fewer observations to compare with).

Four of the five projections agree that a new “all time high” in atmospheric CO2 can become a reality already in March or April 2020.   

Read more about the forecast by clicking the CO2 forecast link in menu. Pdf note with the forecasts: Januaryforecast.pdf

Posted on 9 January 2020

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The day inflation targeting died

Norway’s monetary policy regime formally changed to inflation targeting in March 2001. In the following years, Norges Banks’s practicing of the new policy regime impacted significantly on the interest rate level. However, soon after the coming of the international financial crisis, the footprints of inflation targeting became more difficult to follow in the data, and they soon disappeared altogether.

The figure below tracks this development by showing an estimated “Taylor-coefficient” which measures by how much the policy interest rate can be expected to increase when the inflation gap changes by one unit.

In the heyday of inflation targeting, an increase in the inflation gap could be expected to lead to an even larger increase in the policy rate. However, soon after the financial crisis the estimated Taylor coefficient plunged down zero.  On the face of it, the epoch of inflation targeting was over almost as soon as the regime had installed itself.   

Norges Bank cut policy interest rate three times in the autumn of 2009. However, on exact which day, 15 October, 20 October or 17 December, inflation targeting became defunct may better be left is for the monetary policy historians to find out.      

Figure : Evolution of estimated Taylor coefficient with 95 % confidence interval indicated by dashed lines

Posted 8 January 2020. pdf-version