After the interest rate increase has been reversed, GDP growth will pick up again. After a period, GDP will approach the level that would have been achieved with an unchanged interest rate throughout the period. The 2 results of analyses in the Bank of England are similar, but the uncertainty, of course, is considerable. The key interest rate is set on the basis of an overall assessment of the inflation outlook two years ahead. Our inflation projections and our views on the balance of risks associated with these projections provide a summary of these assessments. Due to a number of factors, there is considerable uncertainty surrounding the inflation projections. Our knowledge of the functioning of the economy is far from perfect. We base our projections on simulations using the macroeconomic model RIMIMI. As the model is not an exact replica of reality, a forecast error arises. In addition, the different economic mechanisms change. Normally, this occurs gradually, but in some cases the changes may occur quickly. Moreover, it may be difficult to assess the current situation in the light of the information available at any one time. The information is often deficient, both because statistics are published with a lag and data contain measurement errors. We must also make assumptions about a number of factors when working on the projections. The economy will occasionally be exposed to events that cannot be anticipated. The terrorist attacks in the US on 11 September represent such an extreme event.
Jarle Bergo: Inflation targeting and the phasing in of petroleum revenues - a dilemma for monetary policy? Address by Mr Jarle Bergo, Deputy Governor of Norges Bank, at the seminar on foreign exchange policy issues arranged by the Association of Economists, Gausdal, 25 January 2002. *  *  *  Introduction Since last year’s seminar, new guidelines for economic policy have been introduced. As the title of my speech suggests, these guidelines will serve as the starting point for my talk. In his presentation last year, Norges Bank’s Governor said “Monetary policy cannot function effectively without a good interplay with fiscal policy”. I will start by taking a closer look at the implementation of monetary policy before I discuss the guidelines for phasing in the petroleum revenues and the interplay between fiscal and monetary policy. Finally, I will take a look at the implications that the phasing in of petroleum revenues will have for our industry structure. These implications may pose a challenge to many, but not necessarily to monetary policy. On 29 March 2001, the Stoltenberg Government issued new guidelines for monetary policy and presented guidelines for fiscal policy. Monetary policy was to be oriented towards low and stable inflation. The inflation target was set at 2½ per cent. The guidelines for fiscal policy imply that over time, the central government budget deficit shall be equivalent to the expected real return on the Government Petroleum Fund. The change in the guidelines for economic policy met widespread support in the Storting.