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Oil wealth and real exchange rates: The FEER for Norway

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  • Q. Farooq Akram

    (Norges Bank)

Abstract

It is often argued that Norway’s sizeable net foreign assets based on its petroleum wealth imply an appreciation of its real exchange rate to a permanently strong level. We investigate this issue within the framework of the fundamental equilibrium real exchange rate (FEER) approach. It is shown that the strength of the FEER depends on the share of imports that can be financed by petroleum (based) revenues. Projections of the FEER over a long horizon suggest that the petroleum wealth implies a stronger equilibrium exchange rate than the rate that would have balanced (non-petroleum) foreign trade in each period. However, the FEER depreciates steadily over time with growth in imports relative to petroleum revenues and converges towards the rate that balances foreign trade. A permanently strong FEER presupposes that e.g. imports stay constant over time. Our results are in accord with the behaviour of the real exchange before and after the discovery of Norway’s petroleum resources.
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Suggested Citation

  • Q. Farooq Akram, 2004. "Oil wealth and real exchange rates: The FEER for Norway," Money Macro and Finance (MMF) Research Group Conference 2004 33, Money Macro and Finance Research Group.
    • Handle: RePEc:mmf:mmfc04:33
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    References listed on IDEAS

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    1. Hinkle, Lawrence E. & Monteil, Peter J. (ed.), 1999. "Exchange Rate Misalignment: Concepts and Measurement for Developing Countries," OUP Catalogue, Oxford University Press, number 9780195211269.
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    8. repec:pri:cepsud:82svensson is not listed on IDEAS
    9. James G. MacKinnon, 1990. "Critical Values for Cointegration Tests," Working Paper 1227, Economics Department, Queen's University.
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    Cited by:

    1. Q.Farooq Akram & Øyvind Eitrheim & Lucio Sarno, 2006. "Non-linear Dynamics in Output, Real Exchange Rates and Real Money Balances: Norway, 1830-2003," Contributions to Economic Analysis, in: Nonlinear Time Series Analysis of Business Cycles, pages 333-377, Emerald Group Publishing Limited.
    2. Yasser Abdih & Charalambos Tsangarides, 2010. "FEER for the CFA franc," Applied Economics, Taylor & Francis Journals, vol. 42(16), pages 2009-2029.
    3. Bouoiyour, Jamal & Selmi, Refk & Tiwari, Aviral Kumar & Shahbaz, Muhammad, 2015. "The nexus between oil price and Russia's real exchange rate: Better paths via unconditional vs conditional analysis," Energy Economics, Elsevier, vol. 51(C), pages 54-66.
    4. Mr. Alun H. Thomas & Mr. Jun I Kim & Aqib Aslam, 2008. "Equilibrium Non-Oil Current Account Assessments for Oil Producing Countries," IMF Working Papers 2008/198, International Monetary Fund.
    5. Q. Farooq Akram, 2005. "Efficient consumption of revenues from natural resources – An application to Norwegian petroleum revenues," Working Paper 2005/1, Norges Bank.
    6. Bouoiyour, Jamal & Selmi, Refk & Tiwari, Aviral Kumar & Shahbaz, Muhammad, 2015. "The nexus between oil price and Russia's real exchange rate: Better paths via unconditional vs conditional analysis," Energy Economics, Elsevier, vol. 51(C), pages 54-66.

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    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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