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Monetary Policy and the Exchange Rate in Norway
This study estimates how monetary policy impacts the exchange rate in Norway using a local projection instrumental variables framework. It finds that a surprise increase in Norway's policy interest rate leads to an immediate appreciation of the currency followed by a gradual depreciation, with the exchange rate normalizing within three months. Similar but opposite effects are observed with the Euro zone's monetary policy. It also explores the effects of Norges Bank's long-term monetary policy projections on the exchange rate.