In the long run, the result will only be higher inflation, not higher employment. Output and employment will return to their potential level. – The third factor is the special challenges to stabilisation policy posed by petroleum revenues. Norway’s export revenues and government revenues can be expected to be very high as long as production remains high and as long as the global market allows producing countries to extract substantial economic rent. At the same time, we know from experience that revenues may vary sharply from year to year. As a result of the high level of earnings and fluctuations in these revenues, the most important contribution fiscal policy can make to stabilising the Norwegian economy is to provide a sound, long-term strategy for the use of petroleum revenues. Attempts to use the central government budget to fine-tune economic activity may have a destabilising effect if these attempts are perceived as a breach in the long-term strategy for the phasing in of petroleum revenues. It is necessary to show that fiscal policy is applied symmetrically in periods of economic expansion and contraction. From the mid-1980s, during and after the credit bubble, it was recognised that a substantial revision of economic policy would be necessary and that the problems created by inflation had to be taken seriously. The exchange rate was chosen as the nominal anchor. Deteriorating competitiveness due to high wage growth would no longer be remedied by means of devaluations.
The model must be transparent and manageable  Norges Bank’s administration, management and Executive Board must be able to interpret and understand the model. It must not be perceived as a black box. It must have a theoretical structure so that we can easily examine the effects of alternative views of the economy’s functioning. 5. The model must reflect the Bank’s view  As a result of the modelling work, the Bank’s views on relationships in the economy will evolve. At the same time, we are developing a model with relationships that we have confidence in. Models will never provide us with a definitive answer. A model will always represent a simplification of reality. We must be pragmatic and exercise a good measure of judgement in addition. In my view, the most important role of models is to provide a framework and structure for the decision-making process, and to ensure that we do not change our views on the functioning of the economy without thorough reflection. BIS Review 36/2004  7  The use of models must also be seen in connection with the uncertainty associated with the actual state of the economy and the driving forces that dominate at a given point in time. It can be a demanding task in itself to find the balance between incorporating new information on the one hand and making abstraction of pure noise on the other. Allow me to illustrate.