In spite of the objective of a fixed exchange rate, several adjustments of the international value of kroner were made in the 1970s and 1980s to compensate for the loss of cost competitiveness due to price and wage inflation. From the mid-1980s the focus of monetary policy was increasingly shifted to the role of a stable exchange rate as a nominal anchor – against the backdrop of very high price and wage inflation and relatively high domestic interest rates following the devaluation in 1986. The EU countries’ lowinflation track record was used as an argument for pegging the krone rate to the ECU in 1990. The currency turmoil in Europe in 1992-93 prompted Norway to abandon the fixed rate against the ECU in favour of a sort of “managed float”, now aiming at keeping the exchange rate “stable” against European currencies, but with no fluctuation margins. This regime is still in force. In this context it is important to note that the small and very open Norwegian economy is highly vulnerable to fluctuations in the international economy. Furthermore, the petroleum sector is of substantial importance to our economy, and mainland industries are largely commodity-based. Whatever the choice of exchange rate or monetary policy regime may be, there will be considerable challenges associated with stabilising an economy which is that heavily exposed to cyclical fluctuations. This has been amply illustrated by recent events.
However, last spring Norges Bank also reviewed the merits of a change in anchor currencies. Norges Bank found the potential benefits of changing the exchange rate target to a trade-weighted basket to be relatively marginal and fairly uncertain, and recommended that the Government refrain from modifying the Exchange Rate Regulation. In the Revised National Budget for 1998, the Government affirmed this view and decided that the Exchange Rate Regulation would continue to apply without any changes, with the euro replacing the ECU as the indicator of the krone’s value against European currencies. Thus, the consequences of the introduction of the euro for the orientation of Norwegian monetary policy might not appear particularly great at the outset. The launching of EMU nevertheless entails changes in the environment for our monetary policy, for the following reasons among others: First, the European Central Bank formulates its monetary policy with the aim of maintaining low inflation for the euro area as a whole. Euroland will be a more closed economy than the individual member countries used to be, and thus exchange-rate changes less important. This can result in larger exchange rate fluctuations between the major countries than in the past. If so, keeping the krone stable against the euro might become more challenging. Second, the launch of the euro will reinforce global financial integration and contribute to higher capital mobility, and the establishment of an efficient payment and settlement system in euros reduces the cost of moving capital.