This is a small change, well within normal variations from one year to the next. Government revenues - and thus the budget surplus - would increase by almost 1% of Norway’s annual GDP. If the increase in petroleum revenues is used in Norway, it corresponds to almost half of the annual growth in the non-oil economy in a normal year. If the private sector of the economy is also expanding, and the economy is already close to capacity, this policy would swiftly lead to strong pressures on the resources in the economy. This would result in a rise in wages and prices, and would also lead to unstable conditions in the foreign exchange market. The Government Petroleum Fund shall serve as a buffer against short-term fluctuations in oil revenues. As large portions of the revenues from oil activities accrue to the state, fluctuations in oil prices and oil revenues will primarily result in changes in allocations to the Petroleum Fund. Since all of the capital in the Petroleum Fund is invested abroad, such changes will in principle not influence  1 2  See Auerbach et al (1993). See Report to the Storting No 1 (2000-01), the National Budget for 2001. BIS Review 105/2000  4  the level of activity in the economy. This makes the Norwegian economy more robust to fluctuations in oil prices and thus less dependent on oil, even in the short run. Some of the petroleum revenues are therefore used to finance central government budget expenditure.
There are also other dissimilarities between the functioning of our respective economies and between our institutional frameworks which may shed some light on the differences between our monetary policy regimes:  11  BIS Review 105/2000  •  Denmark has a long history of a fixed exchange rate which inspires credibility;  •  Denmark’s membership of ERM II provides exchange rate policy with an institutional anchor;  •  Denmark has more stable terms of trade than Norway. Moreover, there is strong and well-deserved confidence in the ability of fiscal policy to stabilise economic growth in Denmark. The most substantial changes in the Norwegian terms of trade are due to fluctuating oil prices. Variations in Denmark’s terms of trade are negligible. In this sense the Norwegian economy has more in common with countries like New Zealand and Australia, which are also large exporters of commodities. A substantial change in the terms of trade  BIS Review 105/2000  12  translates into considerable changes in these countries’ earnings and balance of payments. Over the years this has resulted in sizeable exchange rate fluctuations. The exchange rate is a buffer against changes in the terms of trade. While a country like Denmark has maintained a stable exchange rate, commodity-producing countries typically experience fluctuations in the exchange rate in tandem with changes in the terms of trade. In New Zealand, Australia and many other countries monetary policy is oriented directly towards price stability, and these countries permit short-term fluctuations in the exchange rate.