If other government revenues fall, and the expenditure side of the government budget is shielded, the oil fund will have to foot the bill krone for krone. Chart: Probability of 50 percent decline in the size of the GPFG The risk of a sharp decline in the size of the fund is further illustrated in this chart, which shows the probability of a 50 percent decline in the fund over a ten-year horizon.4 In the initial year, fiscal spending of oil revenues is around 3 percent of the fund’s value – that is to say close to today’s level. Government expenditure is then assumed to grow in pace with the expected growth of the economy, which means the expenditure side is shielded even in a situation with declining revenues. When and if that occurs, the oil fund will carry the cost. With a 60 percent allocation to equities, the probability of a 50 percent decline in the fund over a ten-year period is just over 1 percent. A higher equity share increases this risk, but the risk is still moderate. However, with a higher level of oil revenue spending, the downside risk increases. The yellow bars illustrate a scenario where oil revenue spending in the initial year increases to 4 percent – a familiar figure. In that case, the risk of having to draw down the fund increases considerably. The probability of a 50 percent decline in the fund increases threefold.
My main message concerning this issue: First, fiscal policy must be decoupled from financial assets subject to considerable volatility. Second, it would be unwise to increase petroleum revenue spending from today’s level even if the fund continues to grow. The period of rising government spending of petroleum revenues should now be over. Inflation targeting has funcioned well In 2001, the same year as the fiscal rule was established, Norway introduced an inflation target as part of its monetary policy framework. A number of countries had, in the preceding years, abandoned exchange rate targeting in favour of inflation targeting. This policy change was a response to the challenges associated with the fixed exchange rate regimes in an increasingly open global economy. Since the financial crisis, monetary policy has faced an uphill struggle in many countries. The economic consequences of the crisis have been substantial, and the contributions from fiscal policy have been meagre. Weakened growth capacity has magnified the challenges. At the same time, persistently low interest rates pose challenges to financial stability. Yet despite the fact that monetary policy has been stretched far, no country has retreated from 8/9  BIS central bankers' speeches  the basic rationale behind flexible inflation targeting. In Norway, the Ministry of Finance is now considering whether the regulation on monetary policy should be modernised. After more than fifteen years, this is only natural. It should nevertheless be noted that the system has functioned well.