The Fund serves as a buffer between current petroleum revenues and the use of these revenues in the Norwegian economy. According to the fiscal rule, future petroleum revenue will be added to the Fund while spending shall be limited to the expected real annual return on the Fund, estimated at four per cent. When all the petroleum revenues have been extracted, the Fund would grow no further, but its value in real terms would be maintained – in principle for eternity. This ensures an equitable distribution of the petroleum wealth across generations. The fiscal spending rule partly insulates the economy from fluctuations in the petroleum sector – and when followed it ensures that revenue spending is at a level that can be sustained over time. The difference between the net cash flow and spending is reinvested in foreign financial markets. Norges Bank manages the Fund, and our London office plays a pivotal role in the investment activities. The Pension Fund also functions as a buffer and dampens the wide fluctuations in the krone exchange rate that petroleum revenue inflows might otherwise have generated. The Fund is invested solely abroad, thus acting as a kind of “revolving door” for currency inflows from petroleum activities. With the fiscal rule, it was recognised that the most important contribution fiscal policy can make to stabilising the Norwegian economy is to provide a sound, long-term strategy for petroleum revenue spending. As a consequence, monetary policy had to take responsibility for smoothing the business cycle to a greater extent than earlier.
Our ambition must be to reduce uncertainty with regard to our own response pattern. Financial stability and monetary policy Financial stability means that the financial system is robust to disturbances in the economy and is able to channel funding, execute payments and redistribute risk in a satisfactory manner. Experience shows that the foundation for financial instability is laid during periods of strong growth in debt and asset prices. Banks play a central part in providing credit and executing payments and are therefore important to financial stability. Monetary and financial stability are both important for economic developments. In my view, they are often mutually reinforcing. Financial stability can be seen almost as a prerequisite for price stability. First, it promotes stable developments in financial markets, which is crucial to balanced economic growth. Second, financial stability supports the transmission mechanisms of monetary policy. Conversely, price stability has a positive influence on financial stability. A successful monetary policy will support financial stability by removing distorted price signals associated with high and volatile inflation. Low and stable inflation provides households and enterprises with a clear indication of changes in relative prices, enabling them to make better informed decisions. Allocation of resources will then be more efficient. The Norwegian financial system and its soundness In Norway, responsibility for financial stability is divided between Norges Bank, Kredittilsynet (the Financial Supervisory Authority of Norway) and the Ministry of Finance. To promote efficient cooperation, the regular exchange of information between these authorities is crucial and a framework for cooperation has been established.