The demand for broad money in Norway, 1969-1993

Cointegration analysis is applied to investigate the long run relationships between money, prices, and wages in Norway. Broad money is determined endogenously, and monetary balances were exposed to large shocks during the period of financial deregulation in the midst of the 1980s. In the long run these shocks are absorbed, and a long run demand for money relationship is identified in which real money is determined by real income, the relative price on financial assets (the yield spread) and the relative price on goods (the own real interest rate). Money adjusts dynamically to changes in the exchange rate and private wealth. Domestic price inflation is affected by imported inflation including currency depreciation (a pass through effect), domestic cost pressure (unit labour costs), and excess demand in the product market (output gap effect).