There are also other dissimilarities between the functioning of our respective economies and between our institutional frameworks which may shed some light on the differences between our monetary policy regimes:  11  BIS Review 105/2000  •  Denmark has a long history of a fixed exchange rate which inspires credibility;  •  Denmark’s membership of ERM II provides exchange rate policy with an institutional anchor;  •  Denmark has more stable terms of trade than Norway. Moreover, there is strong and well-deserved confidence in the ability of fiscal policy to stabilise economic growth in Denmark. The most substantial changes in the Norwegian terms of trade are due to fluctuating oil prices. Variations in Denmark’s terms of trade are negligible. In this sense the Norwegian economy has more in common with countries like New Zealand and Australia, which are also large exporters of commodities. A substantial change in the terms of trade  BIS Review 105/2000  12  translates into considerable changes in these countries’ earnings and balance of payments. Over the years this has resulted in sizeable exchange rate fluctuations. The exchange rate is a buffer against changes in the terms of trade. While a country like Denmark has maintained a stable exchange rate, commodity-producing countries typically experience fluctuations in the exchange rate in tandem with changes in the terms of trade. In New Zealand, Australia and many other countries monetary policy is oriented directly towards price stability, and these countries permit short-term fluctuations in the exchange rate.
Auerbach, Alan J, Jagadesh Gokhale, Laurence J Kotlikoff and Erling Steigum Jr: “Generational Accounting in Norway: Is Norway Overconsuming Its Petroleum Wealth?” Report No 75, Foundation for Research in Economics and Business Administration, Bergen 1993. Bernhardsen, Tom and Øistein Røisland (2000): “Factors affecting the krone exchange rate”, Economic Bulletin No 4 2000 (to be published).-{}Report to the Storting No 1 (2000-2001), National Budget for 2001. BIS Review 105/2000  16