There is also an interaction: •  In its budget resolutions, the government authorities will attach importance to the effects of the budget on the Norwegian economy and will therefore take account of interest rate effects. In this way, they avoid a situation where growth in public expenditure and the interest rate push the economy in different directions. •  With a known monetary policy response pattern, the parties to the centralised income settlements can take into account interest rate effects when wage increases are agreed. •  Moreover, the parties to public sector negotiations can take into account that the higher the pay increases are, the fewer there are that can be remunerated over government budgets. The interaction here came into clear evidence when employment in the general government sector fell after the expensive wage settlement in 2002. The authorities can achieve better economic policy results if they can commit in advance to a set of credible policy rules. Households, enterprises and capital markets are forward-looking in their decision-making. It is therefore important that the authorities do not sow doubt, but on the contrary act in a long-term and predictable manner. There must be consistency between plans and actions. Monetary policy’s role is to ensure low and stable inflation. Experience shows that we cannot reduce unemployment over time by simply accepting somewhat higher inflation. In many countries, also in Norway, confidence that inflation will be held at bay has increased because interest rate setting has been delegated to the central bank.
Imbalances in the world economy Low interest rates and risk premiums stand in stark contrast to the considerable imbalances in the world economy. There are particularly larges imbalances both with regard to the US trade and current account balance. This partly reflects the US federal budget deficit. Moreover, US households have a high level of consumption and a low level of saving. Strong demand in the US has sustained growth in the world economy. The deficit in the US is matched by surpluses in Europe and Asia. A persistent deficit has pushed up US foreign debt to a high level. The US population is growing faster than that of other OECD countries. This may suggest that saving in the US is somewhat lower and investment somewhat higher, but the impact is now considerably greater than implied by demographic factors alone. The imbalances may continue for a period. International capital markets are deep and liquid with an ample supply of credit for US borrowers. If creditors begin to fear a fall in prices and withdraw, this may still trigger substantial corrections. This may lead to higher interest rates and perhaps also a fall in US equity markets that spills over to other countries’ financial markets. In that case the dollar will also depreciate. The household debt burden in the US may be another source of instability if households abruptly reduce both demand for housing and consumption.