Oil Revenues and Macroeconomic Volatility in Norway

It is conventional wisdom that Norway is the role model for oil-producing countries; its sensible policies and transparency in the management of its oil revenues have resulted in macroeconomic stability, which most oil producing countries from Africa and Latin America, hobbled by cycles of boom and bust or a Dutch disease, have always been denied. This paper does not take this conventional wisdom for granted given that the Norwegian government's fiscal policy has remained aligned with the cycles of the international oil market. To test whether the Norwegian economy is stable, this paper considers whether the famous 2001 stabilisation policy reform, meant to spread the spending of oil revenues over time, has ushered in a period of lower volatility in Norway. Its results are negative: (i) volatility in Norway's macroeconomic variables has increased after 2001; (ii) that the behaviour of either the Central Bank or the macroeconomy has changed after 2001 is not robust to modelling techniques; and (iii) had it been fully implemented, the 2001 stabilisation policy package would have had destabilising effects. In other words, Norway's volatility is not as insignificant as expected.