If an upward shift in public spending is perceived as permanent, forward-looking households and firms will increase saving to meet higher tax payments in the future. Consequently, the effects of increased public spending on demand for goods and services may be limited. If households know that the increase in public spending is temporary, and is subsequently matched by lower spending, state finances will not be a source of concern for households and firms further ahead. In that case, they do not have to increase saving and increased public spending today will have a stronger effect on total demand. It is therefore important to tighten the fiscal stance in favourable periods to secure the effectiveness of economic policy in difficult periods. Norway is in a favourable position in this respect. The fiscal rule provides a good framework for tightening the stance when the economic cycle turns. Fiscal policy in Norway is conducted with the knowledge of how monetary policy will react. Today’s flexible inflation targeting provides a monetary policy framework and guidelines as to how monetary policy is to be conducted in different situations. The fiscal authorities can internalise the monetary policy response pattern. It is also natural for them to do so as the government and the Storting (Norwegian parliament) have laid down the mandate for monetary policy. When the monetary policy response pattern is known and is consistent over time, the social partners can factor in a monetary policy reaction when setting wages. This viewpoint is most relevant when wage formation is centralised.
BIS Review 119/2009  3  The winding down of extraordinary measures has started In Norway, it has been appropriate to start winding down the unconventional measures earlier than in other countries. In recent months, liquidity has not been supplied through the currency swap lines or liquidity in foreign currency. Loans at long maturities have not been provided since February – several of the loans have now matured. As the markets are now returning to normal, the supply of liquidity will be adjusted so that the money market rate reflects the key policy rate. We want the banks to redistribute liquidity in the interbank market. The underlying structural liquidity in the banking system, i.e. liquidity excluding Norges Bank’s liquidity provision, has been negative in recent years. Structural liquidity was influenced by ingoing and outgoing payments via the government’s account in Norges Bank and is projected to increase ahead, primarily because the government can partly finance increased lending to state banks, payments from the Government Bond Fund and the State Finance Fund and share subscriptions by drawing on their large deposits in Norges Bank. The banking system’s demand for central bank loans can then decrease considerably. The swap arrangement involving covered bonds in exchange for government securities has made a considerable contribution to securing banks’ long-term funding. This spring we saw that the covered bond market started to reopen. The minimum price in the swap arrangement is thus adjusted to the interest rate forming in the market.