Svein Gjedrem: Asset prices and economic policy Address by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), at the Centre for Monetary Economics (CME)/BI Norwegian School of Management, Oslo, 12 September 2008. The text below may differ slightly from the actual presentation. *  *  *  Inflation targeting Inflation targeting was introduced in Norway by Royal Decree in March 2001, after it had been applied for a period in many other countries. Our experience so far has been that inflation targeting has provided a sound basis for stabilising inflation and inflation expectations. In the period from 2003 to the beginning of 2008, inflation was below target. Ever-cheaper goods flowed into Norway from Asia, and with solid productivity growth in Norwegian enterprises, the rise in prices for domestically produced goods and services was also subdued. In an environment of low inflation, the interest rate was also low. At the same time, it was stated that when inflation picked up, the interest rate level would again return to a normal level. Solid growth in output and demand for goods and services gradually led to prospects for higher inflation. Since summer 2005, the interest rate has gradually been raised again to prevent inflation from becoming too high. The interest rate was raised well before inflation moved close to 2.5 per cent. In 2007, the key policy rate reached what we consider to be a normal level.
This rapid credit growth has become the challenge of the moment. However I believe that efficiency and soundness of financial system is a dynamic process and a continuous challenge. Frequently this challenge might generate from international financial markets too. Globalization of financial markets has increased the risk of contagion. The recent developments in the sub-prime mortgage loans, must serve as a excellent reminder of the never ending surprises, which make the trade off between monetary policy and financial stability a difficult balance. I want to make it clear that by financial stability I do not assume only the absence of a financial crisis, but a well functioning financial system that performs well its functions. I think too tight regulations that definitely minimize all the risks are not conducive to sustained growth. Therefore the real challenge for which we are working hard is to find an optimal balance between deregulation which promotes market forces and financial innovations and negative consequences of possible market failures and financial crisis. 4. Balkan region: trends and major characteristics  Dear students, The rest of my discussion will provide few remarks on the developments of the South East European region. I will briefly comment on the common problems and characteristics of the region and voice my opinion upon possible direction of progress and convergence in policies. Recently the Governors of the Region have been increasingly concerned regarding the issues related with banking system activity, market efficiency, financial stability, risk exposure and of course the role of central bank.