Oil wealth and real exchange rates: The FEER for Norway

Qaisar Akram

No 2004/16, Working Paper from 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.

Keywords: Equilibrium real exchange rate; FEER; econometric analysis (search for similar items in EconPapers)
JEL-codes: C32 C53 F31 F41 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2004-11-17
New Economics Papers: this item is included in nep-ene and nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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