With the relatively long time horizon that has been chosen, monetary policy can contribute to stable developments in output and employment. However, situations may arise where more than two years or less than two years is required to attain the inflation target. This will depend on what disturbances the economy is exposed to. Norges Bank will communicate such a change in the time horizon. 4. Monetary policy and competitiveness  Monetary policy cannot be used to influence the size of the internationally exposed sector over time. This is primarily determined by wage and income formation, fiscal policy, including the use of petroleum revenues over the government budget and the adaptability and efficiency of the economy. 8  BIS Review 49/2002  The new monetary policy mandate is linked to the new fiscal policy guideline. When the new guidelines were adopted in March 2001, Norges Bank pointed out that, in isolation, a gradual phasing in of petroleum revenues could contribute to deteriorating conditions for the internationally exposed sector. Norway’s fiscal policy will stimulate demand in the public and sheltered sectors. Consequently, internationally exposed industries may have difficulties recruiting labour and may face higher labour costs. The contest for labour may result in a deterioration in competitiveness internationally.
Over time, growth in real wages must be consistent with growth in labour productivity. An inflation target of 2½ per cent and trend productivity growth of around 2 per cent, according to updated national accounts figures, imply annual nominal wage growth of about 4½ per cent. Under the “Solidarity Alternative” in the 1990s, a stable exchange rate and the rate of wage growth among our trading partners functioned as an anchor for the social partners. Up to 1997, this anchor remained effective. However, growth in labour costs jumped in 1998 and has since been around 2 percentage points higher than among our trading partners. Wage growth is high in relation to earnings in many enterprises. It is demanding to improve efficiency at the pace required to keep up with the rise in labour costs. 10  BIS Review 49/2002  The sharp rise in labour costs in recent years carries with it a potential for higher unemployment. The interest rate is an effective instrument for countering lower demand and growing unemployment when measures to stimulate demand do not translate into higher wage growth or unstable financial markets. However, there is little monetary policy can do to prevent an increase in unemployment that is driven by high cost inflation. Developments in wage settlements have been a driving force behind the appreciation of the krone. The foreign exchange market has responded as expected.