In a speech at a seminar in Oslo, Governor Ida Wolden Bache said Norges Bank is modernising the modelling framework it uses for monetary policy, including a broader update of its main model, NEMO, to better capture abrupt shifts in the economy and international supply-side shocks. She said recent experience showed that the bank's models and assessments after the pandemic were too influenced by the long period of low inflation and underestimated how pandemic-related supply shocks interacted with very expansionary economic policy. The speech also highlighted new bank research showing that unexpected interest-rate increases reduce inflation in Norway over time. Norges Bank combines data-driven short-term forecasting tools with NEMO for three- to four-year projections, and supplements them with survey evidence, a regional network of about 1,600 firms, around 400 quarterly interviews, and higher-frequency data such as household card transactions. Bache said the bank is exploring artificial intelligence and machine learning, building more heterogeneity into its models, and using new microdata on household finances, the labour market, and consumer prices. Research based on household microdata suggests that after a one percentage point surprise rate increase, a household with debt equal to three times income cuts consumption by about 1.5 percent more after one year than a household with no debt. The NEMO update is examining a richer supply side to reflect international transmission through supply chains and Norwegian wage formation, alternative ways to model expectations, and an explicit household cash-flow channel for interest expenses. Separate research cited in the speech finds that an unexpected 0.25 percentage point increase in the six-month money market rate lowers inflation gradually, leaving it around 0.2 percentage points lower during the first three years.
Norges Bank2026-05-21
Norges Bank outlines monetary policy model modernization and presents evidence that rate hikes reduce inflation
Norges Bank Governor Ida Wolden Bache said the bank is modernising its monetary policy modelling framework, including a broad update of its main model NEMO to better capture abrupt economic shifts, international supply shocks and household cash-flow channels. She noted that earlier models underestimated the inflation impact of pandemic-related supply shocks and highlighted new research showing that unexpected interest rate increases gradually reduce inflation and dampen consumption, especially for highly indebted households.