NEW WORKING PAPERS FROM NORGES BANK.

Norges Bank's Working Papers (Arbeidsnotater) present research projects (not necessarily in their final version), and are published among other reasons to enable the author to benefit from the comments of colleagues and interested parties. Only Working Papers published in English are listed below. Subscriptions are available free of charge and individual copies may be obtained from Norges Bank's Library. Postal address: PO Box 1179 Sentrum, N-0107 Oslo, Norway.

Moshe Kim, Doron Kliger and Bent Vale: "Estimating switching costs and oligopolistic behaviour". Arbeidsnotat 1999/4. 51 p. ISSN 0801-2504. ISBN 82-7553-141-1.

We present an empirical model of firms' strategic behaviour in the presence of switching costs. Customers' transition probabilities embedded in firms' strategic interaction are used in a two-stage game to derive structural estimable equations of first order condition, market-share (demand), and supply equations. The novelty of the model is in its ability to extract information on both the magnitude and significance of switching costs, as well as on customers' transition probabilities, from conventionally available highly aggregated data which do not contain customer-specific information. As a matter of illustration, the model is applied to panel data of banks, to estimate the switching costs in the market for bank loans. We find that the point estimate of the average switching cost is 4.1%, which is about one third of the market average interest rate on loans, and that over a quarter of the customer's added value is attributed to the lock-in phenomenon generated by this switching cost. About a third of the average bank's market share is due to its established bank-borrower relationship. The duration of bank-customer relationship implied by the model estimates averages 13.5 years. The presented technique may be applicable to modelling a wide class of problems where only aggregate data exist.

Gunnar Bardsen, Eilev S. Jansen and Ragnar Nymoen: "Econometric inflation targeting". Arbeidsnotat 1999/5.38 p. ISSN 0801-2504. ISBN 82-7533-143-8.

Inflation targeting makes the Central Bank's conditional inflation forecast the operational target for monetary policy. Successful inflation targeting requires knowing the transmission mechanisms to inflation from shocks as well as instruments. The econometric implications are that the exogeneity assumptions of a conditional forecasting model of inflation are crucial to the quality of the...