The fiscal policy stance can affect the growth capacity of the economy. Government regulation and various features of the tax system can influence corporate decisions with regard to localisation, investment and technology. Other measures can affect the labour force and the functioning of the labour market. Over time, real wages must move in line with productivity and real wages. The social partners determine wage growth. We have seen in previous periods that they pull in the right direction when that is needed. The alternative could be a more painful adjustment with higher unemployment. The objective of monetary policy is low and stable inflation over time, while at the same time smoothing fluctuations in output and employment. As long as inflation is low and stable, the krone can act as a buffer during periods of adjustment. We cannot, however, rely on a depreciation of the krone to ensure Norway’s competitiveness in the longer run. Monetary policy cannot influence the long-term growth capacity of the economy. The challenges associated with low growth and changes in business structure must be addressed using other policy measures. Chart: Low growth results in low interest rates Monetary policy easing and low interest rates do not lead to longer term higher growth. The inverse is true: prospects for persistently weak growth result in low interest rates for a sustained period. In order to prevent deflation and recession, the central banks of major advanced countries have implemented extraordinary measures to keep both short- and long-term interest rates low. The medicine has worked.
2  BIS Review 69/2007  The chart on the left of slide 6 introduces a composite indicator of financial market liquidity in the euro area equity, bond, foreign exchange and credit markets. It is constructed to gauge three different dimensions of market liquidity. The first dimension is tightness , that is the magnitude of risk premiums required by market-makers for holding inventories of securities, and it is measured by the bid-ask spread. The second dimension is depth and resiliency , that is the degree to which the volume of transactions impacts on asset prices, and it is measured by using ratios of asset price movements to transactions. The third dimension relates to liquidity risk premia, that is, the compensation required by investors for the risk that attempts to unwind positions could be challenged by uncertain market conditions in the future. This is measured using yield spreads between securities which are known to have varying degrees of liquidity. The evolution of this indicator over time confirms that financial market liquidity has increased significantly since 2001. It rose sharply in 2003 and 2004 and markets have remained very liquid since then. The increase in market liquidity may reflect structural changes in financial markets; for example, the liberalisation of international flows of capital, the securitisation of loans, the development of new financial instruments, and the rapidly growing market presence of highly active financial market participants, such as hedge funds.