Although quarterly growth rates of GDP may soon turn positive in the United Kingdom, unemployment is likely to remain high. Fortunately, it has not increased to the 10% rate now experienced in both the United States and the euro area. But at just under 8%, it is markedly above the level to which we had become accustomed during the period known as the “Great Stability”. The sharp monetary squeeze resulting from the efforts by banks to contract their balance sheets is still casting a shadow over the future path of output and employment. Over the past year, broad money growth has slowed sharply to a virtual standstill in the United States, and it turned slightly negative in the euro area. In normal circumstances, we might expect annual rates of increase of between 5% and 10%. At home, annual broad money growth has slowed somewhat less sharply, and remains positive. The unprecedented actions of the Monetary Policy Committee to inject £ billion directly into the economy – described by some as “quantitative easing” – have averted a potentially disastrous monetary squeeze. The headline in the Racing Post of 29 December said it all: “Quantitativeasing Maintains Perfect Record”. Its Newbury correspondent reported that “Quantitativeasing started as a red-hot favourite and had little trouble maintaining his unbeaten record. Ridden with plenty of confidence his task was made easier when Tail of the Bank came to grief at the second last. His trainer said ‘I was delighted with the way he went through that testing ground’”.
Monetary policy can therefore not be oriented towards stabilising developments only in the internationally exposed sector, as has been advocated. This could easily create considerable imbalances in the Norwegian economy. The low interest rate policy and devaluations in the 1970s and 1980s are examples of how such a policy can fail. Monetary policy was geared towards preventing a deterioration of competitiveness in manufacturing. The krone was devalued on several occasions. But wage growth accelerated to compensate for higher inflation. The result was a wage and price spiral that hit the entire economy. At the same time, there was a sharp rise in the demand for loans, which created tensions in our financial system in the 1970s and in the 1980s. Monetary policy can be an effective means of influencing aggregate demand in the economy. However, there is little monetary policy can do to counter disturbances on the output side of the economy. Changes in wage formation, a decline in productivity growth or a sharp rise in prices for important factor inputs must instead be countered by measures to improve the way the economy functions. Fiscal policy places emphasis on smoothing fluctuations in the economy with a view to ensuring appropriate capacity utilisation and low unemployment. There is an overlap between the tasks that monetary policy and fiscal policy are intended to perform. This makes it natural to raise the issue of whether there is a need to coordinate fiscal and monetary policy decisions.