Schweigaard’s brother wrote2: “When the compulsory payment to Norges Bank came in addition – Anton and I witnessed our parents’ silverware and gold ornaments being melted down to pay the tax – it is easy to understand that many of the town’s inhabitants found it difficult to make ends meet, which unfortunately was also the case with my parents and grandmother, and times were hard.” But Schweigaard was a talented man and it was said that he had probably never been as happy as when he passed his examen artium with flying colours and was admitted here to the University of Christiania. I expect that as you embark on your economics studies, you will get down to business with the same energy and enthusiasm as Schweigaard did then. I expect you will learn that economics is not a perfect subject. But I know that the study of economics will provide you with a useful tool to further improve both the subject and the institutions. In my lecture today, I will provide some insight into how Norges Bank makes use of economic models and touch upon the issues you will have the opportunity to explore further in the course of your studies. Inflation is a persistent rise in the general price level or, in other words, a fall in the value of money. When inflation is high, it is as a rule also variable. This generates uncertainty for households and firms. It is costly to bring high inflation under control.
The blue line in the chart shows that GDP growth was markedly higher than trend growth in the latter half of the 1990s and in the period from 2003 to 2008, but that it has risen somewhat more slowly in the period following the financial crisis. When developments in output are compared with inflation, a pattern emerges. A pickup in GDP growth has consistently occurred 4–5 quarters before a rise in inflation.5 While the chart says nothing about causality, turning points in GDP growth seem to be a fairly reliable leading indicator of turning points in inflation. The path from changes in output to inflation passes through the labour market, among others. We have seen that when economic growth has picked up, unemployment6 has declined one to two quarters thereafter. The relationship between the “output gap” and the “unemployment gap” is fairly strong. This is a useful observation because GDP figures are published with a considerable lag and often subject to revision, while the unemployment data published at the end of each month are not revised. If there is uncertainty about the GDP figures – which there often may be – falling unemployment can be an indication of a recovery in economic growth. Labour market developments, in turn, affect wage growth, as illustrated by the blue line in the chart. High unemployment results in low wage growth, and vice versa. The chart shows that in periods of falling unemployment, wage growth7 moves up fairly rapidly.