An outdated monetary action rule. How sensitive is the Norwegian economy to fluctuations in the oil fund and how to change the current monetary action rule
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In this master’s thesis, we have analyzed how dependent the Norwegian economy has become on the oil fund and its sensitivity to the size of its withdrawals. The government uses withdrawals to cover the yearly oil-adjusted budget deficits, and their size is governed by the monetary action rule. The rule has been a guideline for the rate of integration of petroleum revenues into the economy. To analyze the dependency, we modeled how a 50 percent stock market crash would affect the share portion of the oil fund. We also looked at the impact on the fund of a significant de/appreciation of the Norwegian currency. We saw how these scenarios would affect the available funds to cover yearly budget deficits. Analysis part one shows that the current monetary action rule has become outdated. One of the main reasons is the increased size of the withdrawals compared to the percentage of the state’s total budgetary expenses. The fund’s growth in value has resulted in the economy becoming too dependent on withdrawals since they show an increasing trend. The integration rate of petroleum revenues into the economy is not sustainable in the long run. Analysis part two involves our different, viable solutions to the problem proved in the first part. The solutions we discuss are the cash flow method, the GDP method, lowering the current monetary action rule to 2 percent, and covering deficits by issuing debt. We have concluded that they could be a better solution to the current monetary action rule.