BIS Review 67/2000  4  Chart 3 Consumer confidence indicator and interest rate differential  Chart 3 illustrates the correlation between changes in the consumer confidence indicator and the differential between long-term and short-term interest rates since 1992. The consumer confidence indicator attempts to chart households’ confidence in and expectations concerning their own financial situation and the nation’s economy, and represents a leading indicator for private consumption. The differential between long-term and short-term interest rates is an indicator of the tightness of monetary policy. A negative differential means that short interest rates are higher than long rates, and may be taken as an indication that monetary policy is contractionary. The correlation between the interest rate differential and the consumer confidence indicator would seem to imply that monetary policy, at least in certain circumstances, has a swifter and stronger effect than previously assumed. The effects of monetary policy are channelled through the real economy and the exchange rate. As already mentioned, traditionally there has been a considerable lag before changes in the real economy have affected price and cost inflation. However, if expectations are reflected in household and enterprise behaviour, prices may be affected more swiftly. If price expectations are affected, the effect on the exchange rate will be intensified, since lower price inflation in isolation implies a stronger exchange rate. It is thus likely that there is a third channel which monetary policy can affect, which we may term the expectation channel.
By avoiding the deepest downturns, fewer people are likely to end up outside the labour force. But monetary policy cannot have a primary responsibility for the level of employment. Keeping the policy rate at a persistently low level with the aim of boosting activity and employment more permanently could lead to price and wage pressures and to a sharp increase in house prices and credit growth. This could give rise to imbalances that in turn increase the risk of a downturn and job losses further out. 18  CONCLUSION  NORGES BANK  In the quote from 1970, Erik Brofoss predicted a shift away from a resource-based economy. Fifty years later the structural shift is underway. Brofoss was optimistic about the way ahead, and he was clear about what the main source of progress is as he formulated in his speech:  ECONOMIC PERSPECTIVES 13 FEBRUARY 2020  “Now is the time to reap the fruits of our efforts in general education and vocational training to boost human capital.” Brofoss had high hopes for the coming generations of well-educated young people. The young workers in Brofoss’ day are now retired, or close to retirement. In the coming years, the dependency ratio will increase. The aim must therefore be to make structural changes without further declines in labour force participation. We also have reason to be optimistic despite an ageing population. We still have a highly skilled workforce. We have an economic policy framework that has served us well for nearly 20 years.