A flexible exchange rate can reduce fluctuations in employment and output. Empirical studies do not provide any evidence that floating exchange rates have reduced growth in industrial countries. Rather, they suggest that industrial countries with floating exchange rates have fared well, and often better, than countries with an exchange rate target. A precondition is that there is an economic policy framework so that inflation does not spin out of control. Economic developments and prospects External cyclical developments and events have had considerable implications for developments in the Norwegian economy. BIS Review 11/2004  9  Chart 12. a. Output gap  b. Inflation  Deviation from trend BNP. Per cent  Per cent  5  4  4  US  2  Euro area  3  0 2  -2  1  Euro area  -4 1992  1996  2000  US  2004  0 1992  1996  2000  2004  Sources: OECD and EcoWin  The US fuelled the international upswing in the 1990s, with strong growth in private consumption, rising equity prices and a high level of investment. Inflation was low because productivity increased. In Continental Europe, the upturn started later and was weaker. Capacity utilisation in Germany and France was low through most of the 1990s. Chart 13.
At that time, the credit expansion which was caused partly by the deregulation of the credit market resulted in a debt ratio of around 130 per cent, while the interest ratio increased rapidly over a couple of years from around 6 per cent to almost 10 per cent. However, there is no doubt that the recent rise in indebtedness has made households increasingly sensitive to changes in interest rates. Households tend to focus on their cash flow and are unperturbed as long as their debt-servicing costs can be accommodated in their monthly budget. But an interest rate rise of just a few percentage points would have a much bigger impact on cash flow today than when levels were around 15 per cent. An interest rate rise of four to six per cent would cause monthly costs to increase by 50 per cent. Higher mortgage rates could therefore prompt households to increase their saving and reduce their consumption more than expected or intended. Hopefully we will be able to avoid sharp, quick interest rate rises in our conduct of monetary policy, although mortgage rates are also influenced by events outside Sweden. To some extent though, the effect of any increases in rates could be alleviated by the fact that an increasing number of households have recently been switching over to fixed-rate loans. Developments in the commercial property market Prices in the commercial property market have been driven by somewhat different forces than in the housing market.